Monday’s ugly selloff in global equity markets left behind technical damage.
Lots and lots of technical damage.
For the S&P 500 — represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — important lines of support broke on a big-volume decline. The SPY ETF, however, closed the day right at its 200-day simple moving average, which is a key area to focus on (through an investor psychology lens more than anything).
It also has us asking the question: Should we buy the SPY here?
Today marks the end of the second quarter, and Wednesday marks the start of Q3. Historically at these quarter-end/quarter-start junctures, equities have a tendency to see more volatility or directionality as fund managers window-dress their books, and new fund inflows are being put to work early in the new quarter.
That’s one point in favor of buying Monday’s dip in the SPY.
Of course, Monday’s selling came because of jitters around Greece, which is ready to default on its 1.6 billion-euro payment due to the International Monetary Fund due today. While this could spark further selling in risk assets today, a contrarian perspective argues for a big relief rally upon a Greek default. The current technical juncture would bode well for this, too.
SPY ETF Charts
For perspective around the current technical juncture of the SPY, let’s look at the multiyear weekly chart that stretches back to 2013.
Note that the entire 2015 lift into May came on further waning upside momentum, as represented by the relative strength index (RSI) at the bottom of the chart. But also note that the last time the S&P 500 corrected, in the autumn of 2014, the RSI bottomed not too far below its current levels, which also coincided with RSI levels where “corrections” in May and November 2012 stopped.
On the other hand, from a pure price perspective, Monday’s action cleanly snapped the support line from last October’s lows, which shy of any sharp bullish reversal argues for lower prices in coming weeks, potentially after a bounce to lower highs versus the lower highs from mid June.
Moving over to the daily chart, we see that Monday’s selloff finally pushed the SPY ETF below its support line since March, as well as its 100-day moving average (blue line), which has been a good support reference area. Monday’s drop out of the multimonth consolidation phase argues for further lows in coming weeks and a drop below the 200-day MA.
From a risk/reward perspective, however, active investors would be wise to closely watch the price action around the 200-day MA. In other words, a bullish reversal candle such as we saw on Oct. 15, 2014, and again on Feb. 2 of this year would offer active investors and traders a good area to lean against on the long side. That’s because any subsequent drop back below those lows would quickly prove them wrong, hence the very defined risk.
In summary, active investors would be ill advised to blindly buy into Monday’s free-fall in the SPY ETF, but rather should wait for a bullish daily reversal candle to rear its head, then use the candle’s lows to play for a bounce.
Once this occurs, I will revisit trading the SPY in a follow-up piece.
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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.