Trouble Ahead for SPDR S&P 500: SPY Faces The Perfect Storm

2 sept 2023

While the S&P 500 is often seen as a go-to haven, the current technicals suggest investors should exercise caution concerning the SPDR S&P 500 ETF (SPY). Multiple indicators converge to suggest a bearish downturn in the near term, pointing to target prices of 427.84 and 411.77.

Key Technical Factors:

1. 1. Double Gaps Below
   
2. In recent trading sessions, we've witnessed two gaps below in the SPY's price. Gaps are areas on a chart where the price of a stock (or in this case, an ETF) moves sharply up or down with little or no trading in between. A gap below often signals an impending downtrend and is a bearish indicator. The double gaps accentuate the looming downside.
   
4. 2. Williams %R Oversold
   
5. The Williams %R indicator is well into the oversold territory. This oscillator provides insight into the level of selling pressure in the market. An oversold condition typically suggests that the ETF has been subject to aggressive selling, and this downward pressure is likely to continue in the short term.
   
7. 3. MACD Divergence on the 4-Hour Chart
   
8. The Moving Average Convergence Divergence (MACD) indicator on the 4-hour chart is turning, exhibiting divergence. MACD is a trend-following momentum indicator that shows the relationship between two moving averages of an asset’s price. A turning MACD generally signals a possible change in the direction of an asset's movement; in this case, it corroborates a bearish outlook.
   
10. 4. Blue Line as the Long-term Trendline
    
11. The blue line, which is the long-term trendline traced from the previous all-time high, has been broken to the downside. This break indicates a potential long-term reversal in trend, reinforcing the bearish sentiment.
    

Target Prices:

1st Target: 427.84

When considered in unison, the technical factors above indicate a strong likelihood that SPY will first move toward a target of 427.84. This number isn't arbitrarily chosen; it's a level where we expect some short-term consolidation before a further drop.

2nd Target: 411.77

This price level has shown significant resistance in the past and is backed by heavy trading volume. Should SPY reach this second target, investors should pay close attention, as breaking this level could potentially result in a more severe downturn.

In conclusion, SPY is faced with a perfect storm of bearish indicators. Investors would be well-advised to exercise caution and possibly consider hedging strategies or stop-loss orders to mitigate risk. Diversification remains the investor's most potent weapon against market volatility.