As of the close of trading on Tuesday December 11th the S&P 500 as represented by the popular S&P 500 ETF (NYSEARCA:SPY) was lower by just about 1% for 2018. It has been a choppy year for this index and thus many/most of its constituent stocks. Furthermore, in 2019 there looks to be plenty of further downside and volatility ahead for the SPY etf for active investors and traders to take advantage of.
Troubling Sign No. 1: Early in 2018 the SPY ETF skyrocketed higher only to quickly come back down to earth. While this was a near-term shock to many chart chasers, what many failed to notice was that in the bigger picture global economic growth from Europe to China had begun to slow. This led to choppy trading for many major international equity indices, including the German DAX.
Troubling Sign No. 2: In the United States interest rates saw a steady rise in 2018 and more significantly, the yield curve flattened all year and is now threatening a potential inversion in 2019.
Troubling Sign No. 3: A major reason for the choppy going in equities in 2018 and indeed the struggle for most asset classes this year has been the persistent bid beneath the U.S. dollar. While upside may be somewhat capped in the dollar in 2019, barring any major weakness this should continue to add fuel to the fire of asset class volatility. This relative strength in the USD is particularly troubling for stocks in this late business cycle stage that we are in.
SPY ETF Charts
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
On the multiyear weekly chart we see that the SPY ETF coming into 2018 moved into a steep overshooting rally. Note how the index moved above its well-defined up-trending multiyear channel as marked by the green parallels. This rally quickly faded but remained above the channel. A summer rally then gave investors renewed hope, which however quickly stopped as stocks found new selling pressure in October.
Very simply, in my eye this overshooting move by the S&P 500 above the longer-standing uptrend does not look to be sustainable and a mean-reversion move lower back into the channel is in the cards.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart we see the potential topping phase that the SPY ETF has worked on all of 2018. There is well-defined horizontal technical support around the $260 area. While this support does not have to break immediately from here, the odds are substantial that eventually this support gives and the index works its way toward the lower end of the aforementioned trading channel.
The SPY ETF therefore should have plenty of further downside at some point in 2019 with the $240 area being a major target.
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