I wanted to pass along a few thoughts before I shut down for the night. Other than the fact that the 5% down limit on the stock index futures can hardly be spun as anything but a bearish development, in a vacuum, I might normally be looking to reverse my index short soon as /NQ approaches the 8078ish – 8000ish support zone that I posted earlier tonight (/NQ daily chart below) as that support zone coincides with the first price target on the QQQ swing trade.
NQ daily March 8th
However, while the rate of increase in COVID-19 cases and (much more importantly) the potential impact that it has already had & may continue to have on the US & global economy is certainly a net negative, I would also point out that the effective crash in crude oil prices, with crude futures down 33% in the current session alone (as I type), following the previous 38% drop off the January highs into Friday’s close, only increases the chance of ripple-effects that could lead to more forced selling the equity markets when the regular trade session opens this week.
The current plunge in crude oil prices which, if my math/analysis is correct is on track to be the largest drop in such short order since the financial crisis back in 2008, doesn’t just increase the chance that an improperly diversified, over-leveraged hedge fund(s) or financial institution (bank, trading firm, etc.) may blow up but it also has the potential to contribute to a domino effect of the corporate bond bubble that myself & others have warned of in recent years with an unprecedented amount of investment-grade debt (corporate bonds) issued in recent years on the razors-edge between investment-grade (BBB) and high-yield, aka- junk bond status (BB or below) as the energy sector comprises a large portion of the low-end investment grade and below investment grade (i.e.- junk) bond market. click here for more information on bond ratings
One of the potential risks when not only the stock market falls too much, too fast, especially following a period of extended gains, extreme low-volatility & excessive bullish sentiment and/or a broadly held view that the economy is/was on very solid footing with little to no risk of a recession in the foreseeable (1 – 2 quarters out) future… but also a concurrent ‘crash’ in a very widely held commodity such as crude oil is the possibility of cascading effect on the markets should we get one or more blow-ups of a big hedge fund(s), financial institution, etc.
Other than the big drop in the stock futures & outright crash in crude oil futures tonight, one of the things that stand out to me is the fact that as I type (nearly 1:00 am EST), while the King of risk-off, flight-to-safety assets, US Treasury bonds, are trading higher as would be expected, the #2 flight-to-safety asset, gold, is trading down 0.58%. While I often say that one day does not make a trend, the fact that gold is selling off may be a sign of forced (margin-call) selling/liquidation.
Bottom line: The stock market is coming up on the next decent support levels where the buyers “should” step in but just as resistance levels typically prove to be nothing more than a mere speed bump on the highway to higher highs during a strong bull run with more room to run, one of the ‘tells’ that helps to distinguish a typical run of the mill correction vs. the early stages of something much more is how the market (or a particular stock) acts at the first and sometimes subsequent test of key support levels during pullbacks. When the market (or a stock) slices through a key support level as if it weren’t even there, that is usually a sign of a major shift in the supply/demand dynamics which portends much more downside to come before all is said & done.
First things first, and that would be to see how the market trades tomorrow when all the players have stepped onto the field during the regular trading session. Best of luck on your trades & remember, never underestimate just how far & fast a stock, commodity or the market can move up or down, especially during corrections as stocks tend to fall much faster than the rise.