The UK FTSE 100 has experienced a drop from around 7675 to around 4990 — a huge 53.80 percent in the index that means much more for some individual stocks. In the last days, we are seeing how everything seems to recover, while the COVID-19 news is still quite negative. Let’s see how we could approach this situation.
First of all, we think that we would not follow the COVID-19 news. We believe COVID-19 is certainly affecting the economy, but we also believe that big capitals react beforehand. So if we follow news, we would likely be making decisions too late. Then, if we do not have news, what do we have left?
We have some level references to play with then. The low in 4990 is the maximum stop loss we would accept. If the stock goes under it –we could give a 3– 5 percent extra as a margin- we would sell out all the positions.
Right now, we cannot know if the stock market is going to continue the low trend, enter into a sideways, or make a V-shape and start rising as it was before the crisis.
Nevertheless, taking into consideration that the FTSE 100 was not strictly rising, but in a sideways movement from November 2016 to January 2020, we are not optimistic enough to think that the stocks are going to rise crazily.
However, no matter what, the drop has been so great, than even just a rebound to then fall again could be interesting. For example, we could experience a rebound of about 25 percent and then start to go down again. While that 25 percent would be an awesome profit, it also fits with the beginning of a bearish trend. How can we catch it?
Well, we need to risk money. Nowadays stocks’ movements have great volatility. Anyone investing can win or lose big. And if someone is not happy with that, maybe it would be better to keep their money in their pocket.
If risk is ok, one could take a small share of the money to buy some stocks and see what happens. Here is a strategy:
Besides the low in 4990, we have another partial low in 5360 which seems to be a reasonable stop loss. If that potential loss is ok for the investor, he could try buying.
However, there is one problem. If we think this next up leg is just a rebound, we need to exit before it turns to drops again. Sadly, the drops because of the COVID have been so intense, that we do not have technical references to set a profit objective to sell.
As a solution, we could use Fibonacci levels. Let’s face it, Fibonacci levels give us references, but we never can be sure if the stocks will reach each level. Sometimes, it can go close to the next level and fall before the price touches it.
The first Fibonacci level was around 5623. It is a rebound of 23.6 percent recovery from the drop (from around 7675 to around 4990). The price has reached it, and it has stopped there in a sideways for a while. The next level would be 6017 (38.2 percent recovery) and 6336 (50 percent recovery). So if we buy close to the stop, the price rises and we see that the stock’s price doubts at any of these levels, it make sense to sell. Each time we pass a level, we could raise the stop loss to that level to secure the profits.
All this is just a theory, and prices can do absolutely different things. Do not take this as a recommendation. We are not financial advisers. Get informed and make your own decisions.