The Chinese Stock Market has fallen nearly 15% this week. After the release of poor Chinese manufacturing data on Monday, and weakening currency fears, we started the first US trading day of 2016 with the futures down 400 points on the DOW, 130 points on NASDAQ, 40 points lower for the S&P 500 and a 25 point plunge on the RUSSELL 2000. The US markets continued with massive selling into the close today (Thurs. JAN 7th) after feeling the effects of continued turmoil in the Chinese markets. As a result of “safety net” circuit breakers used to prevent market crashes – the Shanghai Composite Index fell 7.3%…in the first 29 minutes of trading for the second time this week (first time in 25 years).
Entering the end of week one, the employment report tomorrow morning (Fri. 8:30am EST) is going to be the likely catalyst to push these markets higher and end the week on a somewhat positive note (for the bulls). We will likely see some form of a relief rally, as this is the worst four-day start in the history of the US Stock Market. In the chart below, a prominent support level on the DIA (Dow Jones Industrial Avg. ETF) is evident at the current 165 level.
So what happens next? With the VIX (Volatility Index) back up to 25, fear is higher than normal and we could see a continued spike to the 30-35 range. This increase in volatility will raise the fear level even higher – causing people to sell stocks and allowing for markets to fall even further. With a potentially positive employment report tomorrow, and earnings season starting later in the month, now could be a good time to get long some top stocks or ETF’s. Another way to invest in the current Chinese currency degradation and slowdown is by shorting the FXI (or buying put options, among other bearish strategies).
If the bearish technicals forming on Chinese securities bare any indication at all – it’s that of a storm brewing for the Chinese Market in the near future. A storm that could be reminiscent of the 2008 US credit crisis, as many leading experts have also suggested. This market noise can and will create several different ripple effects. The only question is: which comes first? Has our 5+ year bull market come to an end? Is this the start of continued downward pressure? Is now a great buying opportunity to get long US equities? Only time will tell. All that remains is the diligence and wherewithal necessary to trade through this turbulent time. One thing is for certain: this current market environment is ripe with short-term bullish and bearish trading opportunities.
I will be conducting a FREE 90-minute webinar titled: Crisis Swing Trading with Options on Wednesday, January 13th at 7:00pm EST. You can sign-up by Clicking Here.
