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SP500 not out of the woods as yet

January 30, 2020 10:50 PM

As widely anticipated, the sharp rise this week in the number of coronavirus cases and deaths was enough to see the World Health Organisation (WHO) declare a Public Health Emergency of International Concern overnight. 

The declaration fell short of calling for trade and travel restrictions and praised the response of Chinese authorities. A slowing in the infection rate in recent days as highlighted nicely by our colleague Matt Weller in NY overnight here indicates that the rate of the number of new cases is slowing.

That said, I am not entirely convinced it’s time to throw caution to the wind. A view reinforced by the U.S Department of State which earlier today issuing a Level 4 travel warning. It’s the highest level of warnings and one that strongly advises against traveling to China. This follows British Airways decision to cancel all flights to China for one month.

Adding to current volatility, month-end rebalancing is likely to be prevalent today given the outsized moves in equities during January. As a general guide, rebalancing usually involves selling the winners and buying the losers across global stock markets and asset classes. Also generating uncertainty in the short term, the 2020 Democratic presidential primaries begin next week.

Technically as can be viewed on the daily chart below, following the WHO announcement, the S&P500 bounced strongly from the lower bound of the bullish trend channel that has encapsulated the S&P500 over the past 3 ½ months - a development not to take lightly.

However, as viewed on the 4 hour chart below, the rally thus far has unfolded in three waves, often an indication of a correction. Additionally, the rally has thus stalled ahead of 3298, the 61.8% Fibonacci retracement of the 3337.50 to 3233 sell-off.

In summary, providing the S&P500 remains below 3298 and certainly no higher than the 78.6% Fibonacci retracement at 3315, the view is for another leg lower towards 3200/3180, before the uptrend resumes.

Source Tradingview. The figures stated areas of the 31st of January 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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