Stock indexes took a big hit this week following news that the coronavirus was spreading around the globe and that the death toll was rising. The initial reaction incited a decline over the next two days that spanned about 75% of an average month range. When a market moves that far in such a short time frame, an oversold situation kicks in. A week or two of choppy trendless trade typically follows when a market reaches oversold/overbought status. Therefore, be prepared for short-term trends that last two to three days before reversing. This is common price action when dealing with a pace problem.
The virus appears to be contained in the U.S. and no deaths have been reported. This news is positive for the equity markets and may mean the low posted Monday could be an extreme for some time. The virus takes a about a week or two incubate, so traders are apt to be apprehensive for another week or so — or at least until it is clear the virus is contained.
Considering the technical backdrop and the positive responses to earnings, bullish strategies should pay. It may be a good idea to have a short hedge, like puts or covered calls, as protection from further virus threats.
John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.
