End of Day Update:
Stocks slipped for a fifth consecutive day as overseas concerns dominated financial headlines. After three years of currency manipulation, Switzerland gave up and let the franc float. It exploded higher, catching many traders and institutions off guard.
While this move won’t have much of an impact on US earnings, it affects the financial system. Traders who have margin calls in one asset class, raise capital by selling other assets, often those showing the biggest gains. That means we could see some liquidation pressure on US equities. But bigger than just margin calls, this also affects sentiment.
We went from all-time highs a few weeks ago, to obsessing over the half-empty side of the glass. Since every dip has been a buying opportunity, many owners are complacent and not worried about headline noise. The market bounced before and they assume it will bounce again. That’s why we haven’t seen huge waves of selling yet. It also means there are a lot of potential sellers still hiding in the market.
Currently overnight futures are down nearly a percent. If this weakness holds to the open, that puts us near December’s lows. Break that and previously confident owners will start getting nervous. Not far below is the 200dma. Undercutting both of these key levels would trigger a large wave of selling and finally form a capitulation bottom. And that is the bullish scenario. Things get ugly if we crash through 1,950 without finding a bottom. That’s when panic selling takes over and we retest October’s lows.
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.