How Low Will the SPDR S&P 500 ETF Trust (SPY) Go?

SPY - How Low Will the SPDR S&P 500 ETF Trust (SPY) Go?

The S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — capped off last week with a 2.4% drop in more or less a straight line. I often warn investors and traders that risk happens slowly, and then all at once, and last Friday was a prime example.

SPDR S&P 500 ETF Trust(NYSEARCA:SPY)Thus, it’s time for an updated look at the SPY ETF’s levels. Circle these for support and resistance, and we’ll talk about the path of least resistance through September and October.

It’s no secret that the months of September and October tend to see a pickup in volatility. Thus, last Friday’s sudden drop in stocks shouldn’t be all that surprising. For the week, the S&P 500 lost about as much as it dropped on Friday. Looked at differently, the SPY gave back all of its gains from the past month and a half.

And Friday was a broad-based selloff. All asset classes dropped on the back of more hawkish Federal Reserve rhetoric (i.e., fears of a rate hike rose).

Before we look at the charts, remember that since markets still are primarily reacting to the Fed’s puppet spiel of hawkish and dovish statements, should the rhetoric switch back, stocks could stampede just as quickly as they fell last Friday. For what it’s worth, I think this is a sad state for the markets, but we have to play the game that’s in front of us — not the one we wish we were in.

SPY ETF Charts

When I last mused about the SPY on Aug. 25, I offered that any significant one-day selloff that closes the ETF below its 21-day simple moving average would be a reason for caution. This is exactly what took place last Friday, so let’s take an updated look at the charts.

On the multiyear weekly chart, we see that last week’s lousy red candle not only mean-reverted the SPY etf back toward a previous area of resistance near $213, but that this candle also took the character of a bearish engulfing candle. One would thus argue for lower prices in the near-term. That is, it’s a good bet that this day’s worth of bearish momentum should see some follow-through selling in coming days/weeks.

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On the daily chart, we see that last Friday’s selling spree abruptly ended the slow upward churn of the past couple of months. In fact, the SPY violently broke below this previous trading range. The MACD momentum oscillator is now breaking below its zero line, also indicating further selling.

SPY ETF daily chart
Click to Enlarge

By connecting the February lows with the late June lows, we can draw the simple orange-dotted support line, which currently comes in around the $211.50 area and also roughly coincides with the 100-day SMA. This could be a first area of support to watch. Ultimately, considering seasonality and the increasing uncertainties out there, an ABC type of corrective move this September/October looks to be the path of least resistance.

Friday’s selling pressure was the beginning of a corrective phase that may come in waves. First, we could see a wave lower toward $211.50 (for now), followed by a bounce that may see the SPY lift into $216-$217. This could then lead to a second and deeper leg lower that may revisit the late-June lows near $200, which in turn could lead to a better year-end rally.

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