SPY: How Low Will It Go?

Mar. 26, 2019 9:32 AM ETSPDR S&P 500 Trust ETF (SPY)22 Comments17 Likes

Summary

  • Market looks weak and toppy.
  • Worried about global and domestic slowdown.
  • Friday selloff indicates market wants to retest support.
  • SPY targeting a test of $271.2?
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The S&P 500 (NYSEARCA:SPY) was hit hard on Friday, and I expected the selling to continue this coming week. A negative Mueller Report would have added momentum to the selloff. However, this report has removed that possibility. Now, we will see if it can reverse Friday's selloff.

The market often uses news excuses to do what it wanted to do based on fundamental factors. Based on the fundamentals of a global slowdown and a domestic slowdown, the market was ready to take a little hit, and it did that on Friday.

In the case of the Mueller report, we have emotional good news, and to the extent the market is an emotional animal, it will provide a temporary help. So, I expect to see a reversal of some of Friday's selloff. That would probably happen with or without the Mueller Report, because Friday's selling seemed extreme. Traders don't like to be long over weekends, and that is especially true when they knew the Mueller Report was coming out. That type of selling on Friday will now be reversed on Monday with buying.

The market will treat the Mueller Report as so much day-to-day "noise." In other words, short term, the market may improve Monday and Tuesday, but by Wednesday, it will return to the fundamentals that are not looking so hot. Not only are the fundamentals weakening but the charts are also showing buyer exhaustion after making a miraculous recovery from the last selloff. You can see this in the charts below.

I always like to start with the monthly chart of the SPY. It eliminates most "noise" but unfortunately is a lagging indicator. The weekly chart also eliminates noise and has the advantage of leading the monthly chart. Finally, the daily chart gets whipped up with all the day-to-day news but has the advantage of leading the weekly and monthly charts. With that said, let's take a look at the charts.

spy MONTHLY 324

Ignore all the red lines for the time being and just go down to the bottom of the chart, and you will see two important signals turning up. These are the RSI and Full Stochastic, which are just confirming what we already know. The market has had a great bounce up. They bounced up from those important dotted lines, instead of heading lower. This was a positive reversal and has taken price back up to near the old highs. So much for the good news on this chart. (Note: we use the red lines indicate a change in signals for the RSI and Stochastic.)

The bad news is at the top of the chart and is a downtrend in Chaikin money flow. This trend needed to be reversed by the strong bounce up to retest the old high. The failure to see this happen tells me the market will not make a new high without first having a pullback to test support lines marked on the chart. The next one is near 271.2, and I think Friday's pullback might continue down to that level. The market needs some very good news to reverse money flow and make a new high. I don't see that fundamental news on the horizon. Perhaps April earnings will help.

The weekly chart leads the monthly, so let's see if things are improving on the weekly that may later show up on the monthly.

weekly spy

You can see all the signals are topping out and turning down on the weekly chart shown above. Money flow broke briefly above the downtrend red arrow and then turned down last week. So, there is no leading indicator hope in the weekly chart that the monthly chart will improve. On the contrary, it looks as if this giant move up is finally topping out. Of course, all of that could change if April earnings are spectacular. However, between now and April earnings, it looks as if the market is weakening. Last Friday was the first blow to test the downside and probably not the last.

Now, let's turn to that noisy, daily chart which leads the weekly chart.

SPY daily

This daily chart is definitely bearish and provides no leading indicator hope that the weekly chart will improve. You can see all the signals are breaking down. Most importantly, look at the top of the chart with money flow breaking down into the red. See what happened to price last time money flow turned red - a sharp drop in price! Of course, it is always possible that something great will happen to turn these signals positive, but I don't think it will happen this week.

Conclusion

The SPY's last drop to $271.2 was the first warning. Friday's drop is the beginning of the second warning that this move up is having trouble. Let's see if this bearish daily chart, spills over to the weekly chart. Then, we will be concerned. April earnings will be a deciding factor. You can find live updates of our charts at this StockCharts link.

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This article was written by

Tom Lloyd profile picture
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Tom’s book "Successful Stock Signals for Traders and Portfolio Managers" is available on StockCharts.com and Amazon. The StocksInDemand.com system is designed to make money using a combined fundamental and technical grade for each stock. Tom received his MBA in Accounting from St. John's University, where he taught courses on the stock market. He marketed fundamental research, technical research and quantitative research to professional portfolio managers during his Wall St. career. dailyindexbeaters@gmail,com

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