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Oil Slammed, S&P Futures Fall; Risk Aversion Runs on Coronavirus Fear

Oil Slammed, S&P Futures Fall; Risk Aversion Runs on Coronavirus Fear

2020-01-27 14:36:00
James Stanley, Currency Strategist
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WTI Crude Oil, S&P 500, USD, JPY Price and Chart Analysis:

  • Risk aversion themes continue to drive on fears of Coronavirus spreading.
  • WTI Crude Oil prices have lost as much as 20% from the high just two weeks ago.
  • USD and JPY remains bid in FX-land.

Oil, Stocks Fall; USD, JPY Gain on Risk Aversion Fears

Just how widespread is Coronavirus at this point? That’s a very debatable item as the information coming out of China indicates that there are currently 2,744 confirmed cases, of which 461 are considered severe. However, signals on social media combined with action from China (quarantine across numerous large cities) and the manner in which the virus has already spread to other countries, including the US where there are now five confirmed cases, would indicate that this number may actually be higher. But there’s really no way to know at this point and this highlights one of the challenges of coordination with a closed-society where information flow is controlled, and the rest of the world is left to guess based on deduction and clues. Markets generally abhor uncertainty; and that’s what this situation currently presents.

Risk aversion has continued to show in global markets for now going on a second week. Oil prices have been slammed, falling by as much as 20% from the high that was set just a couple of weeks ago. Risk aversion has started to show in US equities, with the S&P 500 falling on Friday and futures markets indicating a continuation of that theme so far this week. And in currencies, both the US Dollar and the Japanese Yen have been well-bid, with the anti-risk Yen showing as one of the strongest currencies in the world despite the low rate protocol at the Bank of Japan.

In the US Dollar, the currency remains very near the fresh seven-week-highs that were set on Friday of last week; holding right around the top of a longer-term zone of resistance that runs from 97.70-97.86.

US Dollar Daily Price Chart

us dollar daily price chart

US Dollar on Tradingview

The US Dollar has been fairly strong against most major currencies, with the notable exception being the anti-risk Japanese Yen. Yen-strength will often show against the US Dollar in times of risk aversion, particularly when the driver emanates out of Asia, such as what was seen around the US-China trade war.

This was looked at in webinars last week on Tuesday and Thursday as the USD/JPY pair had begun to reverse. USD/JPY set a fresh six-month-high on the Friday-before-last; but last week saw price action draw back into a key zone of prior resistance. That sell-off hastened on Thursday and continued through Friday and, so far for this week, remains of interest with USD/JPY testing below the 109.00-handle.

There remains a bit of unfilled-gap on the USD/JPY chart from this week’s open; and taking last week’s close to look for a gap-fill before investigating short-side, bearish continuation strategies could be an interesting manner of moving forward.

USD/JPY MIXED
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -4% -11% -9%
Weekly -14% 4% -3%
Retail Trader Sentiment in USD/JPY
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USD/JPY Daily Price Chart

usdjpy daily price chart

US Equities Start to Show Pressure

Through much of last week, even with flares of risk aversion showing in markets like USD, JPY or even commodities such as Oil or Gold, US equities just continued to march-higher. Until Friday, that is, when a bearish engulfing candlestick showed on the Daily chart; and this will often be approached with the aim of bearish continuation, hypothesizing that a significant factor-of-change showed that brought a strong counter-trend showing into the mix.

So far today, S&P futures are indicating continuation of that sell-off, with price action perching down to support from a bullish trendline projection connecting last October and this January’s swing-lows.

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S&P Daily Price Chart: Trendline Test

spx500 daily price chart

Oil Prices Near Big Zone of Support After 20% Throttling

The year started with risk aversion, albeit emanating from a different driver. With fears of rising tensions between the US and Iran, Oil prices jumped in the first week of 2020 as potential supply disruptions brought buyers into the bid. WTI Crude oil even traded above the 65 level, albeit temporarily; but sellers have been on the attack ever since. Last week brought a big support area into play around the 55-handle; but even that couldn’t stop the slide, and at this point, WTI Crude oil price action is approaching a huge zone of support that shows just above the 50-handle. This zone has brought three different bounces into the mix going back to June of last year.

This could present a compelling option on either side of the risk aversion matter: For those looking to fade this recent bout of fear, a support hold could open the door to reversal potential in the setup, basing off of that support zone and the potential for it to bring yet another bounce. However, for those looking for a continuation of risk aversion, that support around yearly lows, just above the 50-handle, could be used to base into breakout trades.

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WTI Crude Oil Daily Price Chart

wti crude oil daily price chart

Crude Oil on Tradingview

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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