Spike in COVID Cases May Spell Risk Off for Overvalued Stocks and Markets

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(NEW YORK)--After an epic run in stocks the market may be ready for pullback as chart indicators hit overbought levels while COVID-19 cases increase in several US states.

After an epic run following the crash in March the market may be signaling possible pullback as the RSI on the S&P 500, and many other larger cap stocks, hits above 70.

The RSI on stock charts can 'sometimes' indicate when a stock or market is oversold or overbought. In general an RSI of 30 or lower usually indicates oversold conditions, whereas an RSI above 70 indicates a stock or index is over bought.

As of Friday's close the S&P 500 had an RSI of around 72.48 indicating the market may be currently over bought and ready for a short-term pullback from these levels.

COVID-19 Cases Spiking in Several States

Adding to this risk is recent data showing coronavirus cases starting to spike in several states, including Utah, Arizonia, Texas, and North Carolina. With protests continuing in the US we could see an even bigger spike in covid cases in the coming days and weeks, which could also put a 'risk off' on several reopen plays after an epic runs in some of these stocks.

 

What Areas to Watch

With any potential market pullback look for virus related plays and metals to show increased interest as traders look to lock in gains and roll into more safe haven assets such as gold, Treasuries, biotech, and covid related plays on any continued spike in cases in the coming week.

The key to watch this the data and rate of growth on any new COVID-19 cases in above mentioned states.

Don't Fight the Fed

There's an old saying on Wall Street of 'don't fight the Fed', and that case may very well still be in place. Even with improving economic numbers the Fed has not signaled it may pull back any of the liquidity it has been injecting in market anytime soon. The rise in 10-year Treasury rates could help draw out some of that liquidity in short-term, but for traders looking for opportunity any pullback in market could be window to take long-term positions as economic conditions will remain weak thus signaling liquidity will be there to offer bid support to any sustained dips.

With an RSI over 70 in many stocks and indexes, and new coronavirus cases spiking in several states, now may be time to think about taking profits in the very short-term if historical chart patterns unfold here.

Thomas Bustamante is the founder of Trader Madness and has over 25 years experience trading in the small cap. He also advises companies on next generation technology such as AI and Robotics, and how these new tools will alter our world in the future. To get updates on the next new trading idea please register here
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