In March of this year the stock-markets appeared to be in free-fall, amidst a global pandemic. It was difficult to see how far or how long the crisis would last, and it left many adverse to being invested in the financial markets.
I wrote at the time, that this crisis seemed different to all others, and had a higher probability of a quick bounce back. The cause of the collapse was a specific threat from an economy being shut-down temporarily to fight a pandemic. This seemed to be a crisis with a defined end point, and hence the likelihood we would come out of a bear market as quickly as we entered it.
However, even though I was optimistic of a quick recovery, I could never have predicted how quickly and how strongly the US Tech market would recover.
The Tech sector can be considered one of the beneficiaries of the post-COVID “new world”. The working environment has been completely revolutionised this year, and never has technology been so important to maintain communication, and effective business, in remote locations. In addition, online entertainment and commerce are at an all time high, with the global population having to rely on the internet for their shopping and social needs.
This has led to not only a quick recovery for the technology sector, but a strong bull market, putting us at new all time highs repeatedly in recent months.
With hindsight it is always possible to see a good trade. Perhaps one of the best opportunities this year has been investing in the NASDAQ index, and following it’s Elastic Moving Average, a technical indicator that illustrates strong market trends.
The chart above shows the NASDAQ index this year. We reached a new highs near the end of February, when the market was optimistic and strong.
Then the COVID crisis hit, and we quickly collapsed by more than 30%. One of the steepest declines in history. The fall was so quick and so steep, that it gave a potential clue for a quick rebound. This is because very steep declines are normally based on a specific piece of news, not on long term systemic issues. This can be seen in the markets every day, when it spikes up or down, on a given news release, but then quickly recovers to it’s pre-news levels.
By March 23rd we had hit the lows of the collapse. The markets bounced strongly on news of potential ways out of the crisis, as China began to reopen it’s economy after their lock-down. The news that companies like Amazon were seeing unprecedented demand for their services, indicated that the technology sector could be a benefactor of the crisis.
By April we began to settle into an upward trend.
The Green, Blue and Red lines on the chart is the Elastic Volume Weighted Moving Average (EVWMA). It is a technical indicator which attempts to show flow/trends in a market. If the market is not in a trend, it does not work, and will not provide any tradeable signals. However a strong trend will often follow the EVWMA, and this chart is a prime example.
The tradeable opportunities here, are to enter the market near the EVWMA, and trail a stop below it, as the market rises. There is no target. Essentially the trade ends once the EVMA is breached.