Key points for the week (US Markets):
Concerns over economic impact of Coronavirus epidemic are weighing on the market
As the Chinese outbreak has impacted the manufacturing base in China, the global markets are anxious about overall slowdown going forward
After leading Asian economies such as China, Korea and Japan, the virus now is spreading in Italy, adding to the fears that the outbreak is going global
As most of the European markets traded more than 3% lower on Monday morning, that will have an effect on American markets at the opening on Monday
The fear of coronavirus breakout beyond China is making global markets very nervous. The reports of lockdown in Italy following rapidly increasing number of infections is suggesting that the epidemic is getting global. The European markets opened on Monday with a sharp 3% - 4% decline.
S&P Futures in the overnight session were trading 2.6% lower, breaking the lower wall of the channel to test the demand area 3211 – 3245.
DAILY PRICE CHART ES (e-mini S&P 500 Futures)
The American indices SPY (S&P500), QQQ (NASDAQ 100) and DIA (Dow Jones Industrial), which have been trading in ascending channel, had hit the top of the channel and had reverted to the center of the channel by end of last week. As we expect the markets to open in sync with the futures, they are likely to gap down in the demand area as highlighted in trading price chart pictures below.
DAILY PRICE CHART SPY (S&P 500 ETF)
DAILY PRICE CHART QQQ (NASDAQ 100 ETF)
As we see that the markets are heading for an open in the significant demand area, it would not be unusual to see an intraday rally arising from the same. Such price action is observed on multiple occasions, when the market gaps down on a news in strong demand area.
However, such rally should not be trusted as a long-term buying opportunity, as they are short lived. The threats from virus outbreak are real – not only for human lives but also for overall economic growth and global trade, which is severely getting affected. Chinese economy is feeling the impact and that will have global ripple effect.
If SPY breaks below the 320 area, technically it will be end of the uptrend and we shall be looking for confirmation of downtrend. So, this is the time for investors to become cautious.
OUTLOOK AHEAD US MARKETS
Coronavirus pandaemic fears are impacting global markets, and will weigh on the markets. As the week opens, Asian and European markets are down with most of the European Indices trading 3% -4% lower. As we expect S&P index to open 2.5% - 3% lower, overall sentiments are likely to remain negative during the week. We may see a short term rally given the markets gap into prior demand area, however that should not be perceived as long term buy opportunity.