Stocks: Modest rebound is a welcome sign

After that brutal sell-off on Monday, the bulls are happy that, at least for now, the selling has come to a halt!

From a macro point of view, nothing has changed since yesterday. Virus and growth concerns are still there, as too are hopes for a vaccine and more central bank and government stimulus. These conflicting factors helped to keep the stock markets in balance for most of today’s session.

Indeed, as London prepares to go home, not a lot changed for the major indices since the morning after the markets had stabilised a little following Monday’s plunge. Europe closed higher while US indices were climbing back towards their earlier highs at the time of writing. Meanwhile, in the FX the dollar had remained bid, rising against all major currencies and causing the EUR/USD to drop to a fresh 7-week low. Among commodities, gold was little-changed following yesterday’s big drop. The bulls huffed and puffed but failed to make much progress, while the bears likewise had little luck in trying to reach for new multi-week lows and were left frustrated.

The market’s reaction has me thinking that if the selling was to continue, it should have done so by now. The fact that this hasn’t so far been the case, is potentially a positive sign. But we need to see strength into the US close later, if we are to witness some follow-up bullish price action the next day.

Investors remain focused on the rising infection rates in Europe, which triggered a fresh wave of restrictions by the UK government today. Among the new measures, shop staff are required to wear face masks and weddings will be limited to a maximum of 15 people, while from Thursday, all pub and restaurants will be restricted to table service only.  However, PM Johnson said this was "by no means a return to the full lockdown of March", which is the most important takeaway point. The fact that hospitality venues will have to shut from 10pm from Thursday for example is not great but could have been worse.  

So, the new measures will represent a backword step, but one that is needed to help reduce the spread of the disease. But insofar as the pound and the FTSE are concerned, these measures will probably not be too damaging to the economy to warrant a Monday-style sell-off that could last for several consecutive days like we saw back in March.

In fact, the FTSE, which admittedly had underperformed during the stock market melt up, was holding its own relatively well today:


What we need to see next from a bullish point of view is the formation of a bottom pattern, such as THESE reversal formations around current level. For example, a sweep below the 5780 low and a sharp rejection would create a fakeout pattern. If that doesn’t happen and the index continues higher, then a break above the most recent high at just shy of 6125 would confirm the formation of a double bottom. But we must see those or similar types of reversal patterns on the daily first before turning bullish on the FTSE, for the short-term path of least resistance may still be to the downside and there are several resistance levels to take into account including the key 6,000 hurdle.