Expect a Full-Blown Correction if This Line Breaks

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Stocks suffered their fifth straight loss Thursday, with the Dow industrials falling 0.6%, the S&P 500 down 0.9%, and the Nasdaq off a whopping 1.5%. Small caps were hit even harder with the Russell 2000 down 1.9%.

Swiss bankers shocked the financial industry by abandoning their pledge to maintain an exchange-rate floor of 1.20 on the franc-euro rate and lowering the deposit rate to -0.75%. The Swiss franc jumped by as much as 25% against the U.S. dollar. It became obvious that the move was in anticipation of a QE program to be announced by the European Central Bank next week.

To make matters worse, Citigroup Inc (C) fell 3.7% after it reported that Q4 earnings fell 86% from a year ago. Bank of America Corp (BAC) reported a 14% decline in profits and shares fell 5.2%.

Apple Inc. (AAPL) lost 2.7% on an analyst downgrade. Facebook Inc (FB), LinkedIn Corp (LNKD) and Yelp Inc (YELP) fell 2.9%, 2.8% and 4%, respectively.

Defensive sectors led again with consumer staples up 0.2% and utilities gaining 0.8%. Bonds rose pushing the yield of the 10-year Treasury note down to 1.78 from 1.84 on Wednesday.

At Thursday’s close, the Dow Jones Industrial Average fell 106 points to 17,321, the S&P 500 declined 19 points to 1,993, the Nasdaq dropped 69 points to 4,571, and the Russell 2000 lost 22 points at 1,155.

The NYSE’s primary market traded 879 million shares with total volume of 4.2 billion shares, both above average. The Nasdaq crossed 1.9 billion shares. On the Big Board, decliners outpaced advancers by 1.9-to-1, and on the Nasdaq, decliners led by 3.5-to-1.

Russell 2000 Chart
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Chart Key

The Russell 2000 is represented by a chart of the iShares Russell 2000 Index ETF (IWM). The ETF held at its 200-day moving average at $114.25. This line is generally considered by technicians to be an important inflection point. This means it is a technical feature that, if violated on a close, would almost certainly result in another significant price decline.

MDY Chart
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The S&P MidCap 400 index is represented by the SPDR S&P MidCap 400 ETF (MDY) so that I can include volume bars. Like IWM, it has held above its 200-day moving average.

But the fact that these two ETFs closed almost on their lows of the day is not an encouraging sign.

Conclusion

In addition to the small- and mid-cap indices closing just above their intraday lows, the S&P 500 closed below its 2,019 September high by 26 points. This was a significant breakdown that confirmed Tuesday’s outside reversal day.

The near and intermediate outlook is not good. However, after five consecutive down days, we should expect a relief rally, especially with the VIX reaching an extreme high at 22.39. But even it could continue the march north.

The focus is now on the 200-day moving averages of the major indices. If they fail to hold, we should expect a full 10%-plus correction.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/01/daily-market-outlook-expect-full-blown-correction-line-breaks/.

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