Equity markets have been struck with fear in the last two weeks. The fear of uncertainty over the impact of the omicron variant of COVID just at a time where the Federal Reserve is tightening monetary policy. However, after a shakeout on equities which has helped to unwind overbought positioning, this correction looks to be a chance to buy. Fear is abating and indices are rallying again.
- Signs are emerging that Omicron is not as severe as first feared
- Wall Street has seen a similar correction to previous drawdowns
- VIX volatility gauge is falling once more, this is consistent with equity market rebounds
- Indices are breaking resistance levels
Omicron preliminary data is encouraging
White House chief medical advisor, Dr Fauci said on Sunday that the data starting to emerge on the Omicron variant was “a bit encouraging”. Suggestions are that the variant could be causing a milder infection. Dr Fauci is keen to point out though that this is still very early days in the collation of data on Omicron.
So the early signs are positive and markets seem to be making a move on this. Unless there is data that emerges to significantly contradict this, it looks as though the initial fears over Omicron may begin to subside.
Corrections on Wall Street have been of a familiar magnitude
Indices have fallen back in recent weeks. However, looking at the moves on Wall Street, these moves have not been out of the ordinary. What we have seen is that these moves have been very similar to previous corrections since the pandemic. All of these previous corrections were used as a chance to buy.
The recent correction of around -5% on the S&P 500 has been similar to the past five drawdowns on the index. These unwinding moves have also often used the rising 55 day moving average as a basis of support before moving higher once more (except for the September correction).
VIX volatility now falling
When markets get fearful, volatility gauges will spike higher. The VIX Index measures the volatility of pricing for S&P 500 options. Higher levels of fear mean higher volatility and higher cost of premiums on options.
However, in the past two days, since fears over omicron have started to subside, we are also seeing volatility on the VIX Index reduce. This is important because high levels of volatility and fear are consistent with sharp corrections on equity markets. A falling VIX will be coming as equity markets regain their poise and start to look higher again. (The cost of options premiums fall when demand for put options reduces because traders turn positive again).
Indices breaking through resistance
So what does this all mean for the indices themselves? We are now seeing indices driving higher again, breaking through resistance levels and turning corrective phases positive again.
The FTSE 100 (MT5 code: UK100) has been leading markets higher in recent sessions and was the first to decisively break higher yesterday. The move above 7180/7200 resistance on a decisive basis has changed the outlook once more. Having been corrective within the uptrend channel, the bulls are now in control for a retest of 7401 key resistance and beyond.
There is also a big base pattern that has been completed on the German DAX (MT5 code: GER30). Resistance around 15,500 has been stubborn, but the mood has now changed following yesterday’s decisive breakout. The close above 15,510 has completed a base pattern that implies between 430 ticks (on a conservative basis) and 600 ticks of upside. This would mean that upside projection targets of around 16,000 are possible. We see 15,510/15,600 as a near term band of support to buy into any near term pullbacks.
