SPY: Identifying Downside Targets

The summertime rally has been strong and sweet, but unfortunately, I think Jerome Powell put an end to that on Friday. The market has rallied largely off of hopes and dreams that lower inflationary data in July would lead to the Fed slowing down and potentially cutting rates come early 2023. However, I think after Powell’s speech, it’s pretty clear that that isn’t the case.

Hence, the very quick downfall we saw on Friday.

Now, on one hand, you could say the move was a bit emotional in nature and have that be true. Yes, of course, it was. Sell-offs like that always are. But, that doesn’t mean it wasn’t real and doesn’t mean it won’t keep going.

Sector SPDR S&P 500 ETF (SPY) – a 50% Retracement

If you look at it this way, the move we have seen over the past 2 weeks has already retraced 50% of the summertime rally that arguably came the week of FAANG earnings, starting July 19th. I note that as a start date versus June, primarily because June was very choppy in nature and it wasn’t until mid-July that an upside breakout actually occurred.

If you’re a buyer, you could easily come in and say, “50% retracement is perfect! Let’s start buying.” You could still potentially be right if that’s your call. What matters the most here is whether or not that 50% retracement holds. Because you see, if it breaks, and we are sitting currently on key support at $400 right now, then there isn’t much support until much lower. And, it’s that cascading move that would trigger even more emotion, and more selling, until we see continued lower prices.

As of right now, I don’t think it holds. I think the Fed has remained steadfast. I think that data will continue to get worse. I think that commodity prices are also going to noticeably increase coming soon, especially oil. And, if that happens, we will continue to see the Sector SPDR Energy ETF XLE continue higher, along with crude, USO, and oil stocks. While having one of the S&P sectors continue higher will surely help the S&P maintain some type of stabilization, with commodities going higher, especially rates and the 10-year, overall stocks will continue to have downside pressure.

So, if and when this downside pressure continues, and the 50% retracement turns into a 61.8% retracement, and then a 78.6% retracement, on a break of those levels at that point we are looking at new lows, but only after downside support zones are broken with a vengeance.

SPY Downside Support Zones

Traders always ask me where the S&P ultimately is going, but as always, I take it from one decision to the next. That means right now, the key decision point is $400. If that breaks, the next target is $387. If it holds and buyers come in, then I’m not still using the next downside target. My bet is that it breaks.

Ultimately, yes, I do have targets at $380 and then even lower at $355, but we won’t reach those levels without substantial breaks of $400, then $387, and then $380.

As such, these are the key and pivotal zones to watch. Price action should be closely monitored at those levels and if they break, it’s a great spot to look for a downward slide.

I’m betting they do! The mega-cap FAANGs and semiconductors are especially weak and are leading the way lower. The way these stocks lead is where the indexes generally follow.


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