A Look at Market Reversals and Relationships

Posted on Friday, April 3, 2020 at 2:46 PM

These are tough times for all, and it will get worse before it gets better. For traders these highly volatile markets can be scary because the normal fundamental data do not influence markets like we are used to. Fundamentals trump technicals, but even now the fundamentals cannot be trusted. The day ranges for the equity indexes are around six times the norm. Thus, interpreting market sentiment by reading charts can help us navigate these tough times and still be profitable. Price action does not lie. It reveals true sentiment.

Whenever there is an unexpected event, I immediately turn to the main sectors to check the spontaneous reaction in the 10-year note, S&P, gold, U.S. dollar and crude oil. These markets are related in many ways. When one jumps, it frequently affects the others. This phenomenon was apparent this week when crude oil spiked higher on news that an emergency OPEC meeting was being scheduled and that Russia and the Saudis may agree to cut production. Furthermore, President Trump was set to meet with oil executives on Friday. All this good news prompted a rise in oil, equities and the dollar, while gold and treasuries softened some. The relationship between the sectors was revealed simultaneously.

The relationship I am most intrigued by is the one between equity and energy. These two sectors have moved in sync during major moves over the past year and a half. Therefore, pay close attention to how well the oil industry talks go. If oil forms a bottom, the stock market low may not be far behind.

I also like to look at the VIX when volatility is super high. Since the virus took hold, the fairest price for the VIX is about 65. It is around 50 today. If this fear index stays below 65, odds increase for steady to higher prices for stock indexes in the coming weeks.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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