Why The SPY Must Hold This Key Level To Avoid Disaster

The SPDR S&P 500 SPY was trading about 1% lower on Friday for a total of an 8.19% decline since reaching a new all-time high of $479.98 on Jan. 4. The markets are attempting to price in important economic information that will be coming next week.

On Jan. 26, the Federal Reserve will meet to discuss its plan for monetary tightening, otherwise known as rate hikes, to combat rising inflation. When the Fed releases its minutes and Powell takes the stage at his press conference, traders and investors will be looking for a timetable for when, and how often, the central bank plans to raise interest rates during 2022, with the first hike expected in March.

During the fourth quarter of 2021, Fed Chairman Jerome Powell’s tone turned drastically more hawkish when it decided to double its taper of monthly bond purchases on Dec. 15. Over the three days that followed, the SPY pulled back 4.53% before reversing course for a multi-day "Santa Claus rally” that brought it to its all-time high.

On Friday, the SPY was testing the 200-day simple moving average as support. The 200-day is an important bellwether indicator that marks the turning point between what is considered a bull versus a bear market. It’s important to note that the SPY has retraced below the 200-day SMA since June 29, 2020.

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The SPY Chart: The sell-off on Friday was created on much higher-than-average volume, which indicates there is fear in the markets and that the bears are in control. By mid-afternoon, about 125 million shares of the SPY had exchanged hands compared to the average 10-day volume of 99.02 million.

• On Friday, the SPY was in the process of completing a three black crows candlestick pattern, which indicates lower prices may come again on Monday.
• Eventually, at least an oversold bounce to the upside will come because the SPY’s relative strength index is measuring in at about 28%. The SPY’s RSI has not fallen this low since May 23, 2020, which was during the COVID-19 pandemic lows.
• The SPY has resistance above at $441.80 and $447.03 and support below at $437.92 and $433.69.

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