The S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — initially held its gains on Wednesday after the Federal Open Market Committee (FOMC) refrained from raising rates in its June meeting. However, late-day selling pressure reversed the index lower, resulting in a marginally lower close on the day and thus a failed rally attempt.
Next week’s June 23 “Brexit” vote is the next focal point for markets, and traders now have well-defined risk to trade the S&P 500 and SPY ETF.
A good many market participants I spoke with earlier this week thought that a dovish tone by the Federal Reserve yesterday would send risk assets (particularly stocks) higher. Their reasoning remained the same as it has for years — that an easier Fed and more stimulus is bullish.
While we may have yet to see a truer reaction to yesterday’s interest rate decision, traders I spoke with on Wednesday are slowly waking up to the fact that underlying economic and corporate profit growth simply doesn’t warrant a more hawkish Fed — and that might not be bullish for stocks.
SPDR S&P 500 ETF Trust (SPY) Charts
Looking at our longer-term chart of the SPY ETF reveals much of the same that it has shown for some time now — that the index is stuck in a wide and choppy range with defined resistance and support.
Through that lens, price action in the S&P 500 has been telling us that fundamentals are slowing/worsening, and as long as these don’t improve, I find it difficult to believe in a sustainable breakout in the S&P 500 and the SPY.
Note that when the SPY ETF made its February low for the first time since 2009, it broke its major trendline. And over the past 12 months, we have now witnessed two serious volatility spikes last August and again this January/February. To me, all of this still puts the SPY ETF at risk of another and maybe more violent corrective move and limits the upside.
It certainly limits the possibility of aa sustainable breakout above the 2015 highs.
More near-term, the SPY’s failed intraday rally on Wednesday now gives active investors and traders a well defined line in the sand to trade against on the short side.
Note that on Tuesday, the SPY ETF broke below its yellow 21-day simple moving average and that this moving average held as resistance on Wednesday.
On the downside, the $203 area is better support and could be a next downside target.
Any break and hold above Wednesday’s intraday highs around $209.40 would be bullish for a trade back into $212.
One potential bullish scenario could be a stay vote in next week’s Brexit vote.
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