Why will the SPY recover on Wednesday?

  • SPY falls over 2% on Tuesday as stocks react to higher yields.
  • Nasdaq (QQQ) is the worst performing index, Dow is the best, but all are in the red.
  • Will we get a bounce for the SPY on Wednesday?

Tuesday turned out to be worse than forecast and certainly worse than the way the futures markets opened up. European markets had certainly given some indications Tuesday morning that it was going to be a tough US session, but the Nasdaq in particular took things badly as it closed nearly 3%. It was definitely a risk free day as we can see from the performance of high risk assets.

Meme stocks suffered much more declines than major stocks, and crypto names in particular were hit hard.

On Tuesday morning we made a bearish put spread call that nearly tripled, so some of you may have taken profits or partially closed part of the position. Each trade is based on your own needs and preferences. Please manage your risk accordingly. We would probably have taken a decent chunk off the table and let it ride a bit to see if the SPY went down.

Catalysts have been circling for the past few days, with Evergrande appearing to be the favorite, but government bond yields were choosing to burst and that wasn’t what tech stocks wanted to see. It seems that the bond market took the time to digest last week’s Fed taper talks, but when it made up its mind, it did so decisively. The VIX then skyrocketed, adding to investor discomfort.

SPY stock forecast

We can give some credit here as we mentioned these earlier than most of the others. The trend this year was to buy dips, any dips, but we warned it was different this time. The indicators for the breadth of the market had deteriorated. These are, for example, the number of stocks making 52-week highs and the number of stocks trading above their 200-day moving averages (advances / declines, etc.). The SPY had also broken out of the long-term uptrend channel that had existed since October 2020, with any decline held by the lower trendline. When that slump broke out, it was a sign that things were different this time, but the more important fact was that the slump broke through the previous slumps (August 19th). A lower low and lower high is a classic downtrend, and that’s what we’re working with here at SPY.

So far, the 100-day moving average has held the SPY pretty well and Tuesday confirmed it again. The 100-day support is now at $ 433. We expect a rebound today with a retracement back to the 9-day moving average at $ 440, the most likely outcome, and would then use that to go short. Please always use stops. The break through of USD 445 will likely be our stop level and bring the SPY back into neutral territory. Volume is small between $ 430 and $ 420, but our dip buy zone is at $ 415, safer with a huge volume profile bar to support the level and the annual volume weighted average price (VWAP) and 200 day moving average, the converged well to $ 415.

SPY daily chart

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