The harder the drop, the stronger the rebound. As is often the case after outsized, one-directional, moves in financial markets, you often see a sharp move in the opposite direction. Today’s first half of the session can best be described as correcting some of Friday’s overreaction in what was holiday-thinned liquidity. Indeed, crude oil was up some 5%, while the major European indices were up solidly to with gains ranging between 1.5 to 2.4 percent. US futures were led by the Russel, up 2.4 percent.
More assessment needed for Omicron
It is clears that more in-depth assessment of the new Covid variant needs to be carried out, before determining whether the economy is facing a major challenge in the coming months. Investors are evidently making an assumption today that Omicron may not be as bad as had been feared on Friday, and that vaccines may still prove effective. It will take some time – possibly a couple of weeks at least – to understand this variant better, given how little is known about Omicron. So, what might happen going forward is that we will see elevated levels of volatility as investors continually take profit and buy the dips here and there, until there’s more clarity on the virus front, while also keeping a close eye on other macro developments. Therefore, expect some choppy prices action over the next few weeks.
All about what’s next
Whether or not Friday’s big moves were justified is irrelevant now as far as I am concerned. What is important is to figure out whether the market’s direction has now tilted to a more risk-off path. This is something we won’t find out straight away unfortunately, but we will get some ideas by keeping a close eye on price action. In particular, pay attention to whether bullish signals will lead to any upside follow-through, or whether they prove to be traps and fail the bulls. Same for bearish price action.
Crude oil price action may show us direction for risk
After Friday’s ugly sell-off for all sorts of risk assets, the onus is on the bears to step in at resistance levels. For crude oil, which is a key proxy for fear/optimism about demand, potential resistance was being tested at the time of writing. Brent was testing the lower bound of old support/resistance between $76.15 to $77.80ish (see shaded region on the chart):
Source: ThinkMarkets and TradingView.com
If resistance hold here, and we see the formation of some bearish price action on the smaller time frame charts, then what should happen next is some downside follow-through, to validate the recent bearish trend and raised concerns over Omicron. However, if after the formation of some bearish price action here, we see renewed bullish momentum come in, then this would indicate that the longer-term bullish trend for crude oil, and by extension, other markets remain intact. Interestingly, Brent oil has managed to hold its own above its long-term bullish trend line and the 200-day average around the $72.00 to $74.00 area
ahead of the OPEC+ decision on Thursday.