However after yesterdays announcement, the Euro/Swiss currency pair plunged to a low of 0.85 spooking the market and creating chaos. At one stage the Swiss franc had strengthened as much as 30% against all major currencies. Swiss stocks took most of the beating with the Swiss Market Index producing a daily range of 1300 points in an index that is only worth 8400 points as of yesterday. Effectively a strong franc would mean that Swiss stocks get expensive, which is why we saw a big drop in valuations.
There are some analyst speculating that the SNB took this action because it believed that the ECB (European Central Bank) stimulus measures were probable and if it were to happen it would have a difficult time trying to intervene in the franc with such large scale measures in place.
What effects does this have on the Swiss Stock Exchange?
I thought it would be a great time to analyse the SMI since it's not an index that we follow much and see what technical damage might have occurred after yesterday's madness.
The chart I'm going to start with is a Monthly over a time frame of 5 years.
The SMI has been steadily climbing higher since mid 2013, the key level was the break out of the 8000. Once that level was secured the index had a chance to go higher, however what has been forming over the last year is a inverted ascending triangle. These are broadening formations which imply a large degree of volatility. The formation is on the height of a bull run so there will be skeptics wondering if this could be the end of the current bull run.
Some key signs that I saw as important is the fact that the market ran down past the 8000 level and subsequently bounced up from that level. If the breakout to the downside does occur there is a possible move of 1400 points on the cards. Also note that there has been no technical damage to the uptrend.
The next chart is the same SMI index but on a Daily over 3 Years.
Interesting to see is the large Megaphone structure which affirms the large degree of volatility the Monthly chart was suggesting. The green line represents the uptrend and again we see the bounce materialize. The bottom end of the formation is pointing to 7700, if that were to happen it could possibly be the catalyst to further weakness. At the same time support on the uptrend comes in at 8200 so we can't rule out contestation between the bulls and the bears which could lead to more volatility.
It would seems that there are many scenarios which are at play at the moment and anything can happen creating large wells of uncertainty within the financial markets. What is certain though is that the long term outlook for the franc is a stronger one. If the SNB believes that the ECB will put measures in place it can only mean further weakness of the euro against all major currencies, this in turn will lead to a more pressure being applied on Swiss stocks.
What the events of yesterday tell us is that the situation playing itself out in the Euro zone is indicative of the extent of the problems which underline the need for extensive measures to be put in place. Something I think few quite appreciate...
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