The declines of the global stock markets in recent weeks are severe, but not unprecedented. Stock market crashes are as much a part of the financial markets, as bull and bear trends. The impact of the corona-virus and the oil price wars have created a true ‘black swan’ event, at a time when share prices were at the peak of an 11 year bull run. Large institutions have been waiting for a reason to cash in their long-term gains, and find new buying opportunities, now is that time in abundance.
The chart below illustrates three market ‘crashes’ this century. The most notable being the financial crisis of 2008. when markets lost over 50% of their value. The huge difference with the current market crash is the angle of decline. The steepness of the decline we are currently in is almost a vertical line, it would be hard for the markets to fall at any greater angle, especially with the limit-down systems that are in place at the exchanges.
In stark contrast the stock market crash of 2008 was gradual over a few years.
Now, of course, the current crash has only just come into effect, and we do not know how long the declines will continue. However, when trading on a short-term time scale, I often see a sharp decline as having much more potential for a strong rebound. In all the back testing I have done, the sharper decline means the stronger the rebound. Effectively a V shaped bounce.
If I see a market pattern like in 2008, with gradual declines, then I look to go with the flow, and be short with the trend. This pattern is normally an indication of systemic problems within the market, which are not going to have a quick fix, and hence could continue for a long time. In this example it was the financial crisis.
In contrast, when I see a pattern like we are in now with a severe downward angle of decline, it is usually a news driven aberration, a shock to the system, that is often short-lived when rationality returns. On a smaller timescale this is seen almost every week, when some news or data is released the market spikes up or down, then quickly reverts back to the mean, or to it’s starting point. This time the shock to the system that created this aberration could be the corona-virus.
It is clearly early days to define whether we are in a long term bear market, or part of a V-shaped reversal pattern. However the price action does indicate an aberration as opposed to a long-term systemic problem in the markets.
If you were to look for a V-shaped reversal, then the blue dotted line on the chart below is one potential point for this to occur. This is a former major support level at the start of 2019.
All of this analysis is just an opinion based on patterns and price action that I have seen before, and is of course not a guarantee of what will happen in the future. I hope the market can bounce and hold above this level, or at least have a strong pull back once the shock of this pandemic has subsided.
More importantly I hope the virus can be contained and people can be safe again as soon as possible.