Risk on Trade is Back On, But for How Long?

04/07/2020 12:00 pm EST

Focus: STOCKS

Fawad Razaqzada

Technical Analyst, TradingCandles.com

Equity indexes are rallying and hitting some important technical benchmarks, but economic impact still looms, reports Fawad Razaqzada

Things have settled down with global stock indices extending their advance following Monday’s big upsurge and risk-sensitive currencies are also pushing higher. Investors are betting that the Coronavirus outbreak may have peaked and are ignoring the economic slump that we are in. They are hoping that with the death rate falling in parts of the world, things will start to go back to normal soon and there won’t be any further virus outbreaks. They are also hopeful that the recent actions of governments and central banks will help to reduce the impact of the economic slowdown. So, in some ways, rebound makes total sense.

However, I wouldn’t be surprised if the rally were to end abruptly because the economic impact of covid-19 is going to be severe as some of the recent macro indicators have shown. So, while it may be risk-on right for now, be prepared for a potential drop in risk appetite later on in the week. Not everyone will be confident to buy and hold stocks in this market environment, and many will be happy to take quick profits.

That said, momentum is with the bulls currently. The bears must remain patient until at least such a time the major stock index create bearish reversal patterns on their daily charts again.

If anything, some of the major indices have broken their key resistance levels, suggesting the momentum is with the bulls. Below, for example, the UK’s FTSE 100 chart shows a break above a triangle pattern and old resistance around 5660-5705 (see chart below). This area is now going to be first major line of defense for the bulls. The index has also reclaimed the 21-day exponential moving average, which is another objective sign of changing direction. Up next, the 38.2% Fibonacci level against last year’s high comes in around 5910.

Risk on Trade is Back On, But for How Long?

Ultimately, though, the longer-term technical outlook remains bearish with the index being below the 200-day moving average and lots of other key technical levels. Thus, the latest rally could run out of steam soon, especially if Covid-19 and the lockdown remain in place longer than expected. But we must see that reversal stick before turning bearish again.

Fawad Razaqzada, Senior Market Analyst at TradingCandles.com, is an experienced forex market analyst and economist. He posts market analysis on all sectors from both a technical and fundamental. Previously he served as a market analyst with FOREX.com and City Index.

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