The spreading of China’s coronavirus has impacted the U.S. stock market, in effect triggering one often bearish technical chart formation.
Break out the short positions, traders.
With the market’s steep selloff on Monday — marking its fifth straight day of declines amid fears of the economic impact from the coronavirus —the closely watched Hindenburg Omen was activated on the S&P 500, points out strategists at Sundial Capital Research. The Hindenburg Omen’s guidelines say the market has to be in an uptrend, it must show a large number of stocks hitting 52-week highs and 52-week lows and display negatively diverging breadth momentum.
That dynamic came into play with the market’s rapid two straight days of declines, Sundial Capital Research says.
And it could mean bad news for investors, per historical data.
Sundial’s data dating back to 1970 shows the returns for the S&P 500 were negative one-week, two weeks, one-month, two months and three-months following the Hindenburg Omen being tripped. The median return on the S&P 500 three months after the Hindenburg Omen hit tallied 2.2%.
“Let’s take a step back, the market has really ricocheted the last four months. We have had a bit of a parabolic move here since October. When you get moves like this, the market looks for excuses to consolidate. The coronavirus is as good as any,” said BNY Mellon chief strategist Alicia Levine on Yahoo Finance’s The First Trade.
Added Miller Tabak strategist Matt Maley, “The market had become so overbought. When it gets that way on the charts it tends to take more of a pullback before we can say the worst is behind us.”