As stocks round up the third quarter today and on Thursday enter the spooky month of October, the question on many investors is how low can the S&P 500 go?
After a slow sideways shuffle for stocks for most of the year, the month of August rattled many investors out of bed and resulted in technical damage on the charts last seen in 2011. From a risk management perspective active investors should hope for the best but prepare for the worst as it relates to the S&P 500, and by association, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
To be clear, I am not calling for another 2008-09 financial crisis type of stock market rout anytime soon, but the slowing rate of growth in global economic data year-to-date which saw the S&P 500 lose more and more market breadth throughout the year does have the potential to see the SPY fall 20% from the May highs before a better rally into year-end may unfold.
Furthermore, the central bank easing game over the past six months has done nothing to prop up equity markets and hedge fund colleagues that I converse with on a weekly basis are increasingly concerned that the central banks around the globe have run out of ammunition, which would also inevitably shift the U.S. stock market into a more volatile paradigm.
SPY ETF Charts
Starting off with the 15-year weekly chart of the SPY ETF, we see that the ascent off the 2009 lows took place in a well-defined range that began to steepen in 2013 as the index broke past its highs from the years 2000 and 2007.
Ultimately by late 2014 and early 2015, the index overshot the trending range on the upside, but the correction in August quickly mean-reverted the SPY ETF back to the lower end of the range. This also resulted in a meaningful break below the red 70-week moving average for the first time since 2011.
From this perspective, a much-needed initial mean-reversion move has now taken place, but much better support could come in closer to the $160 area, which would constitute a full retest of the 2013 breakout area as marked by the blue horizontal.
For the time being, I do not expect the SPY to retrace all the way back to this area, but considering the aforementioned factors, it should not be ruled out within a nine-month time frame.
On the daily chart, we see that after the initial leg lower in August, the SPY ETF had a swift recovery/oversold bounce into the September Fed meeting, where it promptly rejected the yellow 50-day moving average after also retracing about 50% of the May-to-late-August selloff. The end-of-quarter selling spree that we are currently experiencing has pushed the SPY back toward the August lows, but other indices have already broken below said lows.
From this perspective, the SPY ETF has room toward the $175 area for the time being, which is approximately another 6%-7% lower from Tuesday’s close and would also constitute a break below the October 2014 lows.
Active investors thus could continue to trade the SPY lower in the month of October, using any oversold bounces as the entry signals.
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Successful trading and investing starts with a plan. Download Serge’s essential trading plan, The Essence of Swing Trading e-book. As of this writing, he did not hold a position in any of the aforementioned securities.
