Reply Challenge: report on the final day of trading

This investment challenge took place, unfortunately, during one of the most troubled periods of our
recent history. Several factors have caused such an unexpectedly large impact on every aspect of
our lives, changing our behavior in many ways, touching every level of our existence and our
interaction with the environment. The first of these factors, and probably the main one, was the
erroneous belief that the epidemic would remain confined to its place of first propagation, in
mainland China. This was not the case. In fact, the virus spread faster than the world authorities
could have expected. This also happened simultaneously on the economic front. Obviously the first
country to be hit was China, which experienced a collapse of every stock exchange index, dragging
the other main Asian market indices down too (China, at the time of writing, is in the recovery
phase, due to the end of the lockdown. Indeed the FTSE China A50 index shows a solid increase
from 19/03/2020 until now).
Regarding the European market, the crisis hit all the countries of the European Union, in particular
the southern ones such as Spain and Italy, a few weeks later, but still severely. In Italy, in particular,
the disease spread faster than in the rest of the continent. The Italian Government opted for a strict
lockdown, which halted the majority of productive activities, meaning that, according to forecasts
made by ISTAT, the GDP will decrease by at least 6% in 2020, and consequently the export of
goods and services by 5.1%, and the employment rate by 2.5%.
Finally, in the USA, according to the data taken from the S&P 500, Dow Jones 30 and Nasdaq
indices, the market revenues of recent months dropped from the first half of February. This fall had
an incredibly destructive effect on the American economy: the unemployment rate jumped from the
historical minimum of 3.5% in February, to 4.4% in March.
In this period, as we said in the first part of this report, the markets are facing a moment of
incredible volatility driven by the lack of trust of the investors in the recovery capabilities of the
world economy in the short term. In particular, the attention of traders and other investors has been
polarized by the macroeconomic events of these weeks, which has contributed to shaping the
strategies behind their investments.
I have been following these strategies, therefore, focusing on the most important economic and
political appointments in order to create an investment plan that would strike the right balance
between profit and an acceptable risk rate, within the time window of one day.
The first macroeconomic event that I considered was the meeting of the European Prime Ministers
that took place, via streaming, on 23-04-2020. This was fundamental in the building of my strategy
because of its content.
The governments of all 27 countries of the EU approved unanimously the measures proposed by the
Eurogroup of 540Bl as stimulus for the economy, starting from 1 June. Nevertheless, the thorniest
point of debate, the constitution of the Recovery Fund, remained unsolved or, rather, according to
some, postponed to the coming months. In fact, Italy, Spain and France want financial assistance in
the form of straight grants, while Germany and other northern European countries such as the
Netherlands, want loans to be issued by individual countries in order not to dilute their
creditworthiness. In my opinion, the meeting was not a complete success, but the call of Chancellor
Merkel for more solidarity between countries was a good sign for the future of Europe. However,
my evaluation was that the markets would not have greatly appreciated any procrastination in
finding a common solution, so I expected a loss on the main European market indices for the next
day.
The second group of economic indicators that I referred to were GFK (consumer thrust), PMI
(Purchasing Manager’s Index) for Germany and PMI for the EU.
The former fell to its minimum level since it was first used in 1980 at – 23.3 points (it had
previously been at 2.7), breaking the existing minimum record of 2009.
PMI also recorded a worse than expected decrease of 4.6 points bringing it to 34.4 (whereas it had
previously stood at 45 points).
The latter, again the PMI index, but this time for the European Union, settled at 33.6 points (it had
previously been at 44.5 points).
My first strategy projection, using the data in my possession on 23/04/2020, considering the effects
of the long lockdown experienced and the importance of the manufacturing industry on the German
economy, would have been to invest with derivative instruments to gain from the probable stock
market loss of the German indices the following day.
Those were my expectations for the European market.

For the American market, I based myself on this series of indices: unemployment benefits,
manufacturing and services PMI.
The US Department of Labor has announced that initial unemployment benefit claims have gone
from 5 242 million (revised to 5 237 million units) to 4 427 million units in the past week. This was
a good signal for the American economy.
PMI manufacturing index: expectation 38.0, actual 36.9.
PMI services index: expectation 31.5, actual 27.0
Based on the data available to me, and on the recent statements of the President of the USA, who in
recent days had been pushing for an early end to the lockdown, and on the fact that the Federal
Reserve had already approved a 3 trillion dollar package to kick-start the American economy, and
following the trend of the S&P 500, which since 06/04/2020 has been unequivocally growing, my
strategy would have been to use derivatives on the main American indices to gain from the likely
positive performance of the American stock exchange the next day.
Those were my expectations for the USA market.

The day of April 24 started, according to the forecasts I had come up with the previous day, with a
consistent gap down on all the main indices that I was monitoring for the reasons already expressed
above. My focus, following my initial strategy, was immediately to follow the progress of the DAX
30 (Germany 30). In the beginning of the session, I realized that the market was experiencing a
turnaround. In fact, I had been keeping my eye on the DAX values between 10322 and 10339 for
some days. By April 8, indeed, a value of 10335 (at 17:00) had shown itself to be a support point
for a considerable increase the next day, with a gap up opening. Subsequently, on April 16, a
similar event had occurred with a level of 10326, which served as a support for another
considerable increase. Finally, in the sessions of 22 and 23 April the DAX 30 had, several times,
rebounded on the levels 10339.70 (on 22 April) and 10339.60 (on 23 April) around the area that I
had identified as a possible support. Keeping in mind the support level and the fact that two other
favorable circumstances were added: the first being that after openings in gap down, the trend tends
to go against itself during the morning session; the second circumstance being that this gap was so
big as to lead me to assume that there would be a rebound, already in the first part of the morning.
Therefore, after the index reached a level close to the support point, I had to change my initial
strategy and opt for a bullish position on the DAX 30. Moreover, observing the candlestick graph,
there were no signs of the prevalence of bearish tendencies. Later, the decision to close my position
came when the initial gap closed and the appearance of a bearish candle endorsed my decision. Also
remembering what the macroeconomic data of the day before had suggested to me, I concluded that
the day would be, despite this morning’s rebound, negative in the end. The introduction of the
FTSE Mib (Italy 40), again in long position, was inspired by the strong correlation with the DAX
and gave me the opportunity to accentuate the gains. Inspired by prudence, in order to protect my
investments against adverse scenarios, I chose to include two American indices in my portfolio,
S&P 500 and Dow Jones. In fact, these had very low volatility during those hours because of the
premarket phase. This choice, was ultimately made, keeping in mind my forecast that the positive
trend on Wall Street would continue and that an upward opening of these stocks would make my
portfolio perform even better, reducing the risk of a possible underperformance of the European
indices. In fact, at the end of the trading day, the Italian index, Italy 40, went down by 0.89%, the
DAX 30 by 1.69% while the American indices closed up, S&P by 2.29% and the Dow Jones up by
+1.11%.
To conclude, I will list the instruments that I used to trade: CFD on DAX 30 index, Type: long.
CFD on S&P500 index, Type: long. CFD on Italy 40 index, Type: long. CFD on Dow Jones index,
Type: long. I also traded on other types of derivatives such as shares (Fiat Chrysler Automobiles,
Generali, Unicredit, Verizon, Wells Fargo & Co), ETF funds, Futures on oil, Forex (EUR/USD)
and more. But they had a low impact on my strategy and on balance as well.
In my opinion, this challenge is a fantastic one to take on if you have an interest in the trading
world. Both of the platforms Challengesreply.com and Bg Saxo by Generali Bank, were excellent.
My satisfaction on the final trading day was that I was capable of recognizing a buy signal on a day
that was basically bearish on the majority of the markets, taking profits and limiting the risks. My
personal target, when I decided to take part, was to learn more about the trading world and its
instruments and I think that I have lived up to my expectations thanks to this platform. In this time
of troubles this challenge was also a sort of escape from the routine of everyday life in quarantine. I
also wish to thank the technical support for their quick response time to every email, as well as their
kindness.
Alfonso Di Palma