Swiss Market Index Could Fall a Further 35% On This Chart Pattern

Similarly to other major stock market indexes, the Swiss Market Index (SMI) has corrected sharply from the record highs, falling more than 30% in just four weeks. A low of 7,650, set on March 16, is the lowest the SMI has traded since October 2016.

During this correction, the price action has created a bearish pennant pattern, which, if activated, points towards more losses for the index.

Fundamental analysis: Worst case scenario yet to materialize

Given its proximity to Northern Italy, Switzerland has expectedly been hit hard by the coronavirus outbreak. The death toll has risen to 257, with the number of infected people approaching the 15,000 mark.

As a result, Switzerland has begun using its strategic pharmaceutical reserves to cope with a surge in demand for medicines.

The Federal Office for National Economic Supply said it has begun releasing medicine stored for situations like this, when the demand is extremely high.

“The wave of infections is still rising, even vigorously rising, so it is very important that we all keep respecting the measures,” said Health Minister Alain Berset. Switzerland had previously banned gatherings of more than five people.

The government has also started to deploy army medical units at hospitals to help regions that are badly hit, like Ticino, which borders with Italy.

“The worst-case forecasts that were made weeks ago have not materialized,” said Daniel Koch, head of the health ministry’s communicable disease division.

Hence, it is also expected that the economic hit may also become much worse than now. The government is happy to help, but only in loans, warns Finance Minister Ueli Maurer.

“We are not distributing federal money, but taxpayers’ money. Many of those who pay taxes are now partially unemployed, their jobs are in question, and now we take the money away from them and distribute it somewhere where there are also problems,” said Maurer to a local radio.

Technical analysis: Bearish pennant in the making

The SMI, which is the benchmark Swiss stock market index, has corrected sharply from the record highs set in February. The lowest point of the correction marks the 3-year low for the SMI.
Similar to the overall health situation in the country, the worst days for the Swiss stock market may not be over. The price action is creating a bearish pennant pattern, which is characterized by the price action making a pause in the movement through a strong downtrend, before continuing in the same direction.

You can note a triangular flag as the price moves sideways, making gradually lower highs and higher lows. A break below the supporting trend line will mark the activation point of the pattern. The target for the bears, if the pattern is materialized, are levels below the 6,000 handle, which would result in losses of more than 50%, compared to the February highs.

Summary

The number of infected persons, as well as the death toll, is rising quickly in Switzerland. The government fears the worst is yet to come as the pandemic seems to be gaining traction. The stock market is moving lower, as expected, as businesses continue to suffer from the “stay at home” regimes.