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Tuesday 31 March 2020

The Ghost Of 1987

My last few posts have been a coronavirus COVID-19 series, so I'm putting in the links here so as to refer back to them easily for now. These are the eight posts so far.

18th February - Peering Through The Fog Around Coronavirus COVID-19
24th February - Some Genuine Coronavirus Numbers Coming Through
28th February - Falling Down The Steps
9th March - A Tale Of Two Cities
12th March - Sudden Death
16th March - Pinball Markets
20th March - A Short History of Superflu Pandemics
24th March - A Short History Of Market Crashes

If you missed our webinar on Sunday at  theartofchart.net on COVID-19 and the Financial Markets, then you can see the recording on our March Free Webinars page.

Just a quick update on the progress of COVID-19, which has obviously been growing apace over the last few weeks. Looking at the numbers today, the US now has over 175,000 cases, and that's up from the 129 cases on March 4th that Trump was referring to in his tweet on March 5th. To get from 129 cases then to the current 175,067 cases as of this morning has taken 27 days, in which time the number of cases has doubled about 12.5 times, with today's number being 1357 times larger than the number on March 4th. To put that number in perspective, if that rate of increase were to be maintained, then the entire projected US population in 2020 at 331 million would have been infected sometime in the April 28-9 timeframe.

Now there are a couple of additional factors to consider here. The first is that the numbers on March 4th were somewhat flattered by the reality that hardly anyone had at that stage been tested, so in truth no-one had any idea how many people in the US had COVID-19 on March 4th, with a reasonable assumption that the true number was already in the thousands. The second is that anyone who contracted the virus but was asymptomatic, a proportion that may be as high as 80% by some estimates won't be included in either set of numbers, so if that number is (say) 50%, then we may only need to wait until April 25-6 for the entire US population to be infected.

How flat is this curve? Not obviously flat or flattening much yet at all, but on the plus side, if everyone gets infected then we could at least put an end to social distancing and re-open economies. We'll see how effective current precautions are over the next week or two.

John Hopkins COVID-19 Page:
Now something that I've been thinking for weeks is that this pandemic does not yet have a clear theme song, possibly because it went just viral rather than needing any kind of marketing campaign to spread. Despite the strange current censorship of words such as coronavirus and COVID-19 on social media including YouTube, meaning that content creators receive no ad revenues for any content with a forbidden keyword in the title, some YouTube content creators have boldly stepped up with contributions to fill this gap, and my pick for the best of an impressive bunch of entries is Coronavirus Rhapsody, an adaptation of Queen's Bohemian Rhapsody:
So is there much good news on COVID-19 yet? Not much that's obvious so far, although it may be that western governments have messed this crisis up so badly so far that at least social distancing may not be necessary for much longer. All in all this has been a dispiriting year for anyone looking for signs of intelligent life on earth. On to the markets.

In the absence of any obvious good news, there's not much reason to expect anything other than lower lows soon, but I have been seeing suggestions that this current decline is similar to the 1987 crash, which was distinguished of course by there not being a full retest of the crash low, though there was a fairly marginal higher low made a few weeks later. How likely is this to be similar to that?

Well the decline was also very fast in 1987 of course, but the background to the decline wasn't obviously similar at all. What the two declines did have in common was that they were both large corrections after long and accelerating bull runs, but in the current instance that wasn't the cause of the decline so much as the accelerant that made the decline faster and harder than it otherwise might have been. While economies remain closed down with no obvious dates to reopen or clarity about the economic damage that the current crisis will inflict, there is a high degree of uncertainty about economic prospects for the next few years, and that doesn't look anything like the situation in 1987. We'll see but there's no obvious reason to expect this to play out the same way over coming months and years.

SPX Weekly Chart 1980-8:
That said, there are a few things on the 1987 chart that look interesting in terms of the short term setup The first decent rally was slightly short of a 38.2% retracement, and most of the rally was then retraced. That brings me to the current SPX daily chart, where SPX has retraced almost 38.2% of the decline, and tested obvious resistance at the daily middle band, failing there so far.

SPX Daily Chart:
On the 5min chart I have the pattern setups from the lows and would note the rising wedge from the low, the breakdown and retest today of the high within that rising wedge, and the smaller H&S and larger double top setup that, if they play out, would look for the modest retracement that started today to play out into the 2400 area.

SPX 5min Chart:
On the ES chart there is a still larger double bottom with support at the weekly pivot 2444, On a sustained break below 2444 the H&S target would be in the 2250 area, potentially delivering a higher low that would look similar to the 1987 chart, as long as ES didn't continue lower from there.

ES Jun 60min chart:
So what are we likely to see over the next few days? Well I really like the retracement back into the 2400 area, which would play out the SPX targets and deliver a break down on the larger ES double top. At that point Stan and I are thinking we see an inflection point at which ES either continues down to 2250 and probably lower, or we see a rejection back into today's highs and likely a bit higher, with an eye on the 50% retracement area just under 2800. We'll see.

As everyone is stuck at home, Stan and I were thinking that this would be a good time to run another trader education course at theartofchart.net, so we're setting that up to start Monday 13th April (I think - date to be confirmed tomorrow). I don't have the link for that yet but should be able to tweet that out tomorrow for anyone that is interested. These courses have a lot of content, are taught by Stan and myself personally, and as far as I am aware, at $500 per seat, are a fraction of the cost of any comparable quality courses that I have seen on the web, so if you'd like to learn more about trading successfully, you should take a look. If you are ever having any trouble finding a link to any webinar or anything else that we are doing you can always check my twitter or my partner at theartofchart.net Stan Nabozny's twitter to find the link.

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