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Today, during a brainstorming session at Stock Card HQ (virtual HQ), we were discussing the seemingly irrational movements of the market during the COVID-19 crash. Our very own Karen Sheng, Head of Data Science, who happens to be a professional trader too, walked us through her analysis as to where the market is headed. We thought you would also enjoy reading it. Thank you, Karen!
Reflection on the market from the perspective of a technical trader: The outbreak of COVID-19 and the subsequent nationwide shutdown has been a catalyst for an unprecedented correction of the stock market in a very compressed time frame. Hindsight is always 20/20. This post intends to shed some light on the market behaviors from the perspective of technical analysis. The primary tool used for this analysis is a Fibonacci retracement, which is commonly used to identify support and resistance levels. As we wrapped up a shortened trading week on April 9th, the S&P index was a few ticks away from a critical pivot point, the 50% retracement level at 2793.28. In plain English, the index has recovered approximately 50% from the recent swing low at 2194.83.
Where is the market headed to post-Easter? The nuanced answer is that, as a retail investor or trader, we don’t know; however, the Fib levels give us some guidance on where the target is going to be either way. If the market breaks through the resistance, the next resistance level is around 2934. On the other hand, it’s also likely that the index will pull back and test a new low.
Is there any evidence for such observation? For the short swing immediately after the all-time high, the index hit the 50% retracement level at 3125 and “puked” afterward.
What are the implications for investments? When the market plummets, an average investor would not know where the “bottom” is. However, cost-averaging in the accumulation of stocks in the sectors that are more resilient to the shutdown (e.g., tech sector) could have yielded at least some modest short-terms gains. When the market appears to be rallying again, it’s crucial to fend off the euphoria sentiment (“The bull market is back!” news headlines) and be aware of the resistance and possible pullbacks.
Don't forget to look up the Stock Card of your favorite companies, and while you are at it, make sure to visit our COVID-19 portfolio.