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

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.