The S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — is higher by just about 8% year-to-date. The initial stages of this rally out of the February abyss was a function of short covering. Then in the spring and summer, it turned into a more orderly sector and group rotation game.
While some European and Asian equity markets experienced plenty of turbulence this year, the S&P 500 has mostly been an outperformer. Aside from what some may call better fundamentals for large-cap U.S. stocks, S&P 500 components also were chased higher thanks to the abnormally low-interest-rate environment.
While real investors were being forced into stocks by otherwise low yields, a plethora of hedge funds also continue using this index, its futures, options and the SPY ETF as their primary risk-on/risk-off gauge. So when risk assets like stocks begin looking good from a momentum perspective, these masses of hedge funds chase the S&P 500. This can lead to a further distortion of economic reality for U.S. large-caps.
That’s a little perspective on the SPY ETF from a structural standpoint. Now let’s look at some revealing charts.
SPY ETF Charts
First up is the longer-term chart of the SPY, which looks back all the way to the 2009 lows. While the S&P 500 endured several volatile periods, even the January/February selloff actually held the 2009 support line on a monthly closing basis. Note the long “hammer candles” in both January and February, followed in March by a strong confirmation buying candle. Meanwhile, in July, the SPY broke above its previous all-time highs from 2015.
As such, the multiyear uptrend in the SPY ETF remains intact.
Zooming in closer on the daily chart, we see that the SPY has been trading in an unusually tight range over the past few weeks. As a result, the ETF has held above its yellow 21-day simple moving average on a daily closing basis since early July. So far, even Wednesday’s 0.5% “selloff” managed to keep the SPY ETF above this moving average.
What to Watch
From a risk management perspective, here are the levels I’m watching.
As long as the SPY ETF can hold above its 21-day simple moving average (currently around $217.70) on a daily basis (and more importantly, on a weekly closing basis), this slow grind higher should remain intact. Once this area breaks, a confluence support area around $213.70-$214 comes into play. This ares is made up of the 50-day SMA and previous horizontal resistance (2015 highs.)
Near-term players can either get out of long SPY trades or even flip short upon a daily close of the SPY below the 21-day SMA, using a price target near $214. Per definition, a break back below into the high $213s to low $214s would not be catastrophic — just a mean-reversion lower to retest a previous technical area of resistance, which then could become support.
More importantly, however, a dip back into the high $213s to low $214s would not constitute a spot to blindly buy the SPY ETF. Instead, it’d be a spot where tactical traders could look for bullish reversal signals (exhaustion selling by the bears), which could then set up a next rally again.
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