The SPY gapped up 0.86 percent on Thursday but plunged intraday to close the session down 2.34 percent off the open. On Friday, the ETF gapped down slightly and continued to slide, falling over 1 percent lower by mid-morning.
From a charting perspective, the SPY is reacting to a number of bearish signals that have been developing since late January, when the ETF fell below the 200-day simple moving average (SMA) for the first time since the beginning of the COVID-19 pandemic in February of 2020. The loss of the level caused a death cross to appear on the SPY’s chart in March, which accelerated the potential for more downside.
SPY Chart
The SPY began trading in a downtrend between two parallel lines on March 29, which set the ETF into a falling channel pattern. The formation is considered bearish until a security breaks up bullishly from the upper descending trendline of the pattern on higher-than-average volume.The SPY broke up from the pattern on April 19, but there wasn’t enough bullish volume to sustain the move and the rejection of the 200-day SMA on Thursday caused the SPY to drop back into the falling channel on Friday and resume the downtrend.
The 50-day SMA, which is now trending about 1.9 percent below the 200-day, has begun to curl downwards, which indicates there is increased bearish pressure. The eight-day exponential moving average (EMA) is also trading below the 21-day EMA, which is bearish.
The SPY will eventually bounce to form at least another lower high, which may give bearish traders a solid entry point. The bounce is likely to happen over the coming trading days because the SPY’s relative strength index (RSI) is measuring in at about 41 percent. The ETF may find support at, and bounce from, the lower trendline of the channel.
If the SPY closes the trading day near its low-of-day price, it will print a bearish kicker candlestick, which could indicate another gap down is in the cards for Monday. If the SPY bounces up to close the trading day with a lower wick, it will print a hammer candlestick, which could indicate a bounce is on the horizon.
The ETF has resistance above at $433.69 and $437.92 and support below at $426.56 and $420.76.
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