Where next for the Dow, after its largest ever Q1 fall?

After the worst quarter for global markets since the 2008 financial crisis, IG’s Victoria Scholar takes a look at what’s set to drive price action in Q2 and applies some technical analysis to the Dow.

Stock markets see record falls

It’s the start of the second quarter (Q2) of 2020, providing us with an opportunity to reflect on the turmoil that gripped global markets in the first three months of the year and look forward to what will drive markets this quarter.

The 11-year equity bull market came to an abrupt end in February, leading to the worst quarter for global stocks recorded since the 2008 financial crisis amid the COVID-19 pandemic.

The S&P 500 fell into a bear market, falling 20% from its recent high, at the quickest pace in history. Meanwhile, the Dow Jones Industrial Average and the FTSE 100 plunged 23% and 25% respectively, in their worst quarterly performances since 1987 and the largest ever Q1 fall for the Dow.

US stimulus package injects some positivity

However, last week some positivity came back into play for markets on the back of major monetary and fiscal stimulus from the United States and around the world.

The White House passed a $2 trillion fiscal stimulus bill and the Federal Reserve (Fed) committed itself to open-ended quantitative easing. As a result, the Dow enjoyed its best week since 1938, while the S&P 500 logged its best week since 2009. Gold also caught a bid, with its best weekly performance since 2008.

What tests do the Dow and other markets have to pass?

Looking forward, a number of tests lie ahead for markets. The first comes from the trickle of economic data, which will lay bare the extent to which the COVID-19 is weighing on the real economy. Last week’s US jobless claims figure for example already showed a record 3.28 million Americans filing for unemployment. There is no doubt that the data will be weak, the question is whether it will undershoot already sharply lowered expectations.

The second test will come from earnings season for Q1 which kicks off in April. According to FactSet, the S&P 500 is expected to report a 5.2% declining in Q1 earnings year-on-year (YoY) and a 10% decline in Q2. If actual earnings fall more than that, we could see further downward pressure for equities.

The final test comes from the evolution of the coronavirus itself. White House officials have said that US deaths could reach 240,000, while the United Nations has said the world is facing its worst crisis since World War 2. France, Spain, Russia and the UK have just recorded their highest daily deaths, with the UK reporting a 27% day-on-day increase – the biggest on record. How the number of cases develop, and the changing severity of the global pandemic, will have a material impact on markets.

Dow Jones technical analysis

In terms of the technical analysis on the IG platform, the Dow from peak to trough shed more than 38% of its value.

Since 23 March, it has been trying to rally from the lows and attempted to break through resistance at the 38.2% Fibonacci retracement line at 22,548.6. However, it failed to do so for very long before declining once again to just above the next Fibonacci support level, the 23.6% retracement line at 20,890.3.

Over the last week, the price action has been in consolidation mode, stuck between those two previously mentioned Fibonacci levels. It would make sense to look for a break out of that range either on the upside or downside for an indication of future price action.

It is also worth paying attention to the 20-day moving average, which the index is close to breaking below. If it pushes through, that might act as a negative indication for the outlook for the Dow as well in the short term.

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