The panic selling that overwhelmed the markets over the last month has subsided. The VIX indicator has come off of its violent spike in mid February with a current reading of 44 versus a peak of 82 just about a month ago. While this statistic has fallen off the high, we are still in an elevated state, thus we are not quite back to ‘normal’.
More information about the actual facts of the world pandemic have come to light which fortunately dismisses the most pessimistic views. Unfortunately, damage has been done to all businesses, large and small, but the ultimate damage to businesses worldwide remains to be determined. The most heavily damaged areas, hospitality and airlines will be areas of intense scrutiny in the months ahead. No doubt, some will not make it, but the ensuing survivors will be much stronger. It’s unlikely that hotels, airlines and cruise lines will disappear and thus, a generational opportunity is at hand.
We’ve explored the use of relative strength analysis to determine the stronger groups even as the overall markets declined. Now that some kind of baseline threshold has been established, we note that such relatively strong companies are in the lead of the recovery thus far. Intel, Microsoft, Johnson and Johnson and Nvidia have retraced significant portions of their declines, all of them at or beyond the 62% thresholds for a normal retracement. I am quite optimistic that such companies will be able to make new highs in the months ahead.
Using the tactics discussed earlier, we found logical entry points even as uncertainty roiled the markets. From our “Early Signs” post on March 17, we were able to discern Intel’s declining downside momentum at the 49 area. As of today, Intel has printed over 61 dollars. During the selloff, it was clear that the technology and chip sector were reluctant to drop as much as the overall markets and accordingly, many have gained back large portions of their decline.
We also notice the groups that continue to post weaker rallies, in particular, the financials as measured by XLF. There is still murkiness as to how they will fare with the yet unknown consequences of far reaching business shutdowns. At the same time, many chart patterns in this group show basing action as well, albeit perhaps not as robust as the strong technology sector. It appears that BAC for example has seen the worst of its decline as downside momentum is slowing.
I am still of the opinion that using key chart points is the proper tactic for gauging risk going forward. Having target thresholds of support and resistance will provide an objective map for investment. The chart of the Dow Jones below is an updated one that we depicted a week ago showing target levels.
We can see that the first rally brought prices to bounce off the 38% area of expected resistance before falling back to the area labelled ‘scenario B’. Prices have managed to push through this area and accordingly, the 50% retracement area, (the 23,800 price level) is the next threshold of significant supply. We can note that this level coincides with the level of previous support.
The observation that many market leaders mentioned earlier have managed to push above their 62% retracement levels is encouraging and a further broadening out of strength can make the “Possible Scenarios” post of March 22, less likely. For now, we use retracement thresholds as guideposts for the big picture.
For individual issues, we use relative strength and significant candle formations to pick entries.