Dow Jones Tweezer Bottom At SupportThe Dow Jones Industrial Average(DJIA, average of top 30 US stocks by market capitalization) closed back above the psychological level of $20,000 today and logged a gain of roughly 1%. Price also closed above the lower broadening wedge line(shared in previous charts) for the second day in a row which indicates that this level is still acting as a technical support level for price.
A popular candlestick pattern has also appeared on this two day hold above the lower wedge line which is called a Tweezer Bottom Candlestick Pattern. A tweezer bottom involves two price candlesticks that can signal a market bottom and are reversal patterns that occur when two or more candlesticks touch the same bottom level after an extended downtrend, indicating that a reversal may soon occur. Tweezer bottoms are considered to be short-term bullish reversal patterns and indicate that sellers were not able to push price any lower. Each price candle in a tweezer bottom consists of a long lower wick which represents the low of the day, while the candle bodies are relatively small and are located near the upper end of the total daily candle range.
This candlestick pattern is forming at a price level that was already expected to act as support(lower wedge line) which could indicate that the level will hold as support in the short-term leading to a relief rally in stock prices, which given the speed and magnitude of the selloff a relief rally is due, but not guaranteed. The lower wicks of each candle in the tweezer pattern are also holding above the 2015 support level highlighted in green. This is a secondary level of support stemming from historic levels of interest stretching back to 2015, which can also be found in previous charts shared.
It would appear that a combination of technical support levels with added fiscal stimulus and Federal Reserve intervention are leading to a pause in the downtrend while showing the potential for a bullish reversal back to the upside, at least in the short-term. Technical and fundamental traders views are aligning right now with a bullish bias in hopes that technical support and fundamental news will remain positive for price going forward.
If a rebound in markets is to come, we can look to overhead resistance levels in the Fibonacci retracement range for an idea of where price may bounce to. This Fibonacci range stretches from 100%(all-time high) down to the current lows(0%), and in between are levels based on the ratios found in the Fibonacci sequence. The first Fib level to watch for is the 23.6% which would represent price regaining 23.6% of the losses seen in during the recent decline and is the first level that price needs to rise above in order to add more bullish/positive bias. As long as price is currently below this 23.6% level the overall trend for price will remain down as price trading below it’s 23.6% Fib is the most bearish/negative level to be below. The most important level for price to move back above is the 50% Fib level which would represent price regaining 50% of the losses seen during the decline. Price trading above the 50% is considered bullish, while trading below the 50% is considered bearish. The ultimate level for price to beat to signal a return to an uptrend is the 61.8% fib level, which is the main ratio in the Fibonacci sequence, and also referred to as the Golden Ratio.
While the 50% and 61.8% are a long way off from price regaining, we can look for short-term movements for signals of trend reversal or downtrend continuation. For now our short-term movements that signal a possible trend reversal are the tweezer bottom candles, technical support holding at the lower broadening wedge line, as well as fundamental support coming from the Federal Reserve and U.S. government in the form of lower interest rates, bailouts for banks/corporations as well as fiscal stimulus for the American workers being affected by the coronavirus outbreak.
While these bullish signals are a good indication that we could see a bounce in the short-term, the overall outlook remains bearish since we are only in the early stages of the outbreak in the U.S. It is yet to be seen if the current intervention by the Federal Reserve and government will be enough to combat the coronavirus, which is still spreading at an exponential rate within the U.S. Bearish fundamentals are also abound as the US State Department issued a ‘Level 4 Do Not Travel’ advisory for U.S. citizens today. They are advising that all U.S. citizens avoid all international travel due to the coronavirus, and are stating that those currently outside of the U.S. should return immediately unless they are prepared to remain outside of the U.S. for a prolonged period of time. This is likely an indication that the U.S. is about to go into lockdown and halt all international and domestic travel, which would be an even larger burden on the US economic system.
Aside from the State of Emergency declaration made last Friday by President Trump, this travel advisory by the State Department is the most bearish fundamental news to come out arising from the coronavirus outbreak in regard to the U.S. economy and stock market. There has also been a report released by the U.S. government stating that the current outbreak could last 18 months, which mirrors a recent report by scientists at the Imperial College London with both entities stating that we could see waves of outbreaks meaning that even if we manage to successfully slow this virus via quarantines it will likely continue to keep coming back until a vaccine is found. I view these statements as bearish enough to negate any short-term bounces in markets as the overall outbreak appears to be a long-term event rather than short-term event. Markets have priced in a short-term pandemic in this -40% drop from all-time highs with hopes that the government will have it contained and gone by summer. If it becomes apparent that they do not have the situation under control, traders will begin to price in the 18-month prediction by health and government officials meaning we will most certainly see further declines in markets and not enter just a recession, but a depression. Companies can weather a 2-3 slowdown/shutdown in business with the current bailout packages coming, but 18 months of being shutdown means more layoffs and more company doors that will likely never reopen again. If 18 months is the real number we are looking at, we shouldn’t be worried about a recession, but rather a depression.
The short-term view on markets remains neutral, with the potential for a bounce in markets due to technical support being reached and fundamental news via bailouts. Intermediate to long-term view remains bearish due to the fact that this outbreak is still in early stages and still spreading at an exponential rate.
18 months of potential quarantines and businesses not being open with more likely to close. Keep that in mind before you hit that buy button on your trading screen.
