As we are heading into the next trading week, let's quickly recap what's currently going in the markets, analyzing the major indices, precious metals, and commodities.

There is so much fear floating around about the global economy amid the coronavirus outbreak. The death toll has already breached 900 deaths including two people outside of China. We have seen more and more warnings about the lowered first-quarter Chinese economic growth as well as globally. I summarized most of those in the article titled: Will the coronavirus crush the world economy?

https://sebmarketwrap.blogspot.com/2020/02/will-coronavirus-crush-world-economy.html

And yet the stock markets in the United States after roughly 3% correction two weeks ago have reached all-time highs for the 8th time this year. One would say but the economy... The economy does not matter, FOR NOW, what matters is the massive liquidity injections of central banks.

To give you a sort of perspective, Chinese stock indexes after dropping roughly 9% when opened on Monday, February 3 due to extended holiday caused by the outbreak have recovered almost all of their losses (as of Thursday, February 6), with the Chinext technology index actually ending the week in positive territory.

source: Bloomberg, David Ingles Twitter

This unbelievable recovery was, of course, the result of enormous currency injections by the People's Bank of China, together with partial ban on short-selling for brokerage firms and a rate cut.


As you can see, only on Monday, February 3 China's central bank pumped into its financial system 1.2 trillion yuan ($172 billion), the largest amount EVER (data goes back 15 years). And this is on a gross basis. When we look at a net amount (when some loans mature then this number is subtracted from the gross amount) over the last four weeks, the data is even more impressive.

source: ZeroHedge

Zero Hedge noted that China's Central Bank has injected as much as 2 trillion yuan of money over the last four weeks. This is an equivalent of $286 billion. For comparison, the Federal Reserve has injected roughly $400 billion in four months due to the repo crash. No wonder, why Chinese stocks have recovered so quickly.

Talking about the Fed, its total value of assets on its balance sheet has also picked up over the last two weeks.


From January 29 to February 5, total assets have increased by $25 billion.

Therefore, liquidity bonanza is at its height, markets are very happy about that reaching new all-time-highs. It does not mean, however, that there are no opportunities. Let's bring me some charts then, considering the short term perspective.
There are three indices I watch the most intensively, the S&P 500, Nasdaq 100 and German Dax.


The above is the S&P 500, below is Nasdaq 100.


For both indices, I drew ascending channels which roughly have started at the time when the Fed announced its 'Not QE', 'QE4' operations, resuming its printing press. Apart from one false break on the S&P 500 during the last trading week amid coronavirus outbreak, those channels have held very well. Until they break decisively to the downside, I expect this pattern to continue. If the prices fell below then look for supports at a green line I drew on the two above charts.


In terms of German 30 largest companies, the situation looks a little bit different. By using red circles I highlighted all-time highs or triple top on the index. I also drew a rectangle that Dax has been trading in for several weeks. Considering the macro picture as well as the above technical analysis I decided to short the index, with the Stop Loss above the all-time-highs. My target is between 12900-13000. I think that German stocks are less supported (than US and Chinese shares) by the Central Banks' liquidity and also will be more affected by the Chinese virus outbreak than the US stocks.
This rationale leads us to the next asset which is beloved by the FinTwit community, gold.


Recently I reopened my long position in the yellow metal at around $1550 price which coincided with the green upside trendline. My target price is between 1590-1600 at the least and the stop loss below the mentioned trend. If something else happens and the price convincingly breaks to the upside I will consider holding the position for longer.

Staying in the topic of the precious metals I am also closely watching platinum which jumped above the several years' downside trendline a couple of months ago, starting to grind higher.


To me, one possible entry was on the 50-day moving average (blue line) and the second potential entry I am looking for is at the upside trendline which I drew on the above chart using the green color.

As you can see, I am trying to keep things simple and safe. This is my short term perspective and I want to emphasize that it should not be confused with the long term market trends and developments.

SUMMARY

If you are tired of catching up with massive central banks' currency injections there are also assets which trade based on supply and demand to a higher extent. It takes some time to understand their movements but the recent coronavirus outbreak shows perfectly that demand for oil and copper cannot be printed.


As the chart shows, since the beginning of January the price of WTI Crude oil has declined more than 20% falling into a bear market, whereas copper price often considered as the benchmark of the global economy has dropped 8.40%.

For those who are riding with liquidity (including me), I have a great warning from the famous Mohamed A. El-Erian, Chief Economic Adviser to Allianz. President-Elect of Queens’ College, Cambridge University. Authored "When Markets Collide" and “The Only Game in Town".


And this applies to both the long term and the short term perspectives.

I wish you profitable weeks ahead.

Writing from one of the many surfing places in the world Sydney, Australia

Seb

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