SPY Forms This Pattern Ahead of CPI, FOMC: Here's What To Watch Into Next Week

The SPDR S&P 500 SPY was spiking higher in the premarket on Friday before the U.S. Labor Department released producer price index (PPI) data, causing the ETF to open down about 0.3%.

PPI data for the month of November came in at 7.4% year-over year, down from 8% in October but slightly above economist estimates.

Despite the higher-than-expected number, Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, believes the Federal Reserve will reduce its rate hike from 0.75% to 0.5% when it meets next week.

Related Link: US Adds 263,000 Jobs In November As Labor Market Stays Hot Despite Fed Hikes

Fed chair Jerome Powell suggested the central bank could begin easing back on its interest rate hikes during his speech at the Brookings Institution on Nov. 30. Consumer price index data, set to be released on Dec. 13, will be the last data point the Fed receives about inflation before making its Dec. 14 decision.

When Powell signaled the fed may begin to shift its policy, the S&P 500 reacted bullishly, rallying over 3% and closing the trading day above the 200-day simple moving average. Despite PPI data suggesting Powell may have the data needed to follow through on pulling back, the S&P 500 behaved mostly neutral, unable to gain momentum to the upside.

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The SPY Chart: After the SPY temporarily regained support at the 200-day SMA, the ETF closed the subsequent two trading days above the level before falling under it, which created a bull trap. On Tuesday, momentum to the downside caused the SPY to break down bearishly from a rising wedge pattern, which also negated the ETF’s uptrend.

• Although the SPY lost its uptrend, the ETF hasn’t yet confirmed a downtrend by printing a lower high. If the ETF trades lower on Monday, Friday’s high-of-day will serve as the first lower high within a new downtrend.
• The steep drop between Dec. 1 and Dec. 6, paired with the slight three-day rise between Wednesday and Friday, has settled the SPY into a possible bear flag pattern on the daily chart. If the SPY breaks down from the lower ascending trendline of the flag on higher-than-average volume, the measured move is about 4.1%, which indicates the SPY could drop toward $381.
• Bears want to see big bearish volume come in and drop the ETF down under $394, which could indicate the bear flag has been recognized. Bulls want to see the SPY close up above the eight-day exponential moving average, which would negate the bear flag.
• It’s also possible that the SPY chops sideways and doesn’t react to any chart patterns until Wednesday when the Fed releases its interest rate decision.
• The SPY has resistance above at $400 and $404 and support below at $394.17 and $385.85.