You Ask, We Analyze: As The SPY Continues To Plunge, Here's Where To Watch For The Bounce

Zinger Key Points
  • Fundamentally, the SPY is suffering the consequences of geopolitical events.
  • The SPY will eventually bounce to form at least another lower high, which may give bearish traders a solid entry point.

On Thursday evening, Benzinga asked its followers on Twitter what they’re buying at the open on Friday. From the replies Benzinga selected one ticker for technical analysis.

@SnowsBurner, @NealEllis16 and @AndreasErnesto are buying the SPDR S&P 500 SPY.

The SPY gapped up 0.86% on Thursday but plunged intraday to close the session down 2.34% off the open. On Friday, the ETF gapped down slightly and continued to slide, falling over 1% lower by mid-morning.

Fundamentally, the SPY is suffering the consequences of geopolitical events, with the Russia-Ukraine crisis continuing to spook investors. Soaring inflation has also prompted the Federal Reserve to act aggressively by raising interest rates at a fast pace. On Thursday, Fed Chairman Jerome Powell said he will recommend the central bank hike interest rates by 50bps in May. In March, the Fed was more dovish, approving a rate hike of 25bps.

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.

The bulls have fought hard to regain the 200-day SMA and have succeeded on a few occasions but on Thursday, when the SPY attempted to regain the level as support and failed, the bears regained firm control.

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The 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% 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%. The ETF may find support at, and bounce from, the lower trendline of the channel.

See Also: How to Read Candlestick Charts for Beginners

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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