Coronavirus Goes Global, Brent Blasted by Bears
Matt Weller, CFA, CMT February 24, 2020 3:28 PM
Brent is starting to look like its ready to begin another leg lower...
While the spread of the virus in China is showing signs of stabilizing, at least to the extent official numbers can be believed, traders have been alarmed by the spread of the virus in other countries. The absolute number of cases outside of mainland China remain low, but the exponential growth in the number of international cases of COVID-19 is starting to look eerily similar to the timeline we saw on mainland China almost exactly 1 month ago:
Source: Johns Hopkins CSSE, GAIN Capital
Compounded with the already dramatic interruptions to global supply chains in China, traders fear that a rapid spread of the disease to other major economies could be enough to temporarily tip global economic growth into contraction in the first half of the year. Japan, Italy/the Eurozone, and South Korea, where cases grew from 30 to 750 in the last week alone, are the current hotspots to watch.
Of course, the spread of the virus is impacting every major market, but oil has seen one of the strongest reactions. Crude benchmarks in both the US and UK are trading down by over -4% so far today. Focusing on Brent Crude, prices fell roughly -25% peak-to-trough in a month from early January to early February, and after staging a fierce recovery rally over the last two weeks, Brent is starting to look like its ready to begin another leg lower.
Technically speaking, Brent has only been able to recover to the shallow 38.2% Fibonacci retracement level of the previous drop, signaling that sellers remain in control. This level coincides with the 50-day exponential moving average and key psychological level at $60.00, lending it even more significance.
Over the last three days of last week, oil prices carved out a “evening star” candlestick pattern. For the uninitiated, an evening star formation is relatively rare candlestick formation created by a long bullish candle, followed a small-bodied reversal candle near the top of the first candle and completed by a long-bodied bearish candle. It represents a transition from short-term bullish to bearish momentum and often marks a near-term top in the market.
Source: TradingView, GAIN Capital
Moving forward, continued worrisome headlines around the spread of coronavirus could take Brent crude oil down to retest the month’s lows near 53.00, which also represents the lowest price that oil has traded at since late 2018. If that level gives way, a continuation toward the 2.5-year lows near $50.00 may come next. At this point, the market’s near-term bearish bias will remain intact as long as prices remain below the key $60.00 level.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.