The SPY Drops As Traders Price In Possible 8th Consecutive Rate Hike: The Bull, Bear Cases As Volatility Picks Up

The SPDR S&P 500 ETF Trust SPY was volatile Friday, gapping up to start the trading session before ran into sellers who caused the market ETF to drop half a percentage point intraday after data released from the University of Michigan showed inflation expectations remain elevated.

Expectations that inflation will remain stubborn rose in May and traders are now pricing in another rate hike when the Federal Reserve issues its decision next month. Investors hoped the Fed would pause after applying its seventh consecutive rate hike in May.

The news had the SPY looking to print a bearish engulfing candlestick, which could indicate lower prices will come again on Monday. If that happens, the recent uptrend the ETF began trading in on May 4 will be negated and a downtrend could be on the horizon.

A downtrend occurs when a stock consistently makes a series of lower lows and lower highs on the chart.

The lower lows indicate the bears are in control while the intermittent lower highs indicate consolidation periods.

Traders can use moving averages to help identify a downtrend with descending lower timeframe moving averages (such as the eight-day or 21-day exponential moving averages) indicating the stock is in a steep shorter-term downtrend.

Descending longer-term moving averages (such as the 200-day simple moving average) indicate a long-term downtrend.

Traders wishing to trade the volatility in the stock market can use MIAX’s SPIKES Volatility products. The products, which are traded on SPIKES Volatility Index (SPIKE), track expected volatility in the SPDR S&P 500 over the next 30 days.

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The SPY Chart: The SPY reversed into an uptrend on May 4 after printing a double bottom pattern at near the $404 level on that day and April 25. The SPY’s most recent higher high was formed on Wednesday at $414.54 and the most recent higher low was printed at the $408.87 mark on that same day.

• If the bearish engulfing candlestick is confirmed with lower prices on Monday, selling could accelerate and drop the market ETF down toward the 50-day simple moving average (SMA). If that happens, bullish traders would like to see the SPY print a bullish reversal candlestick, such as a doji or hammer candlestick near the indication to suggest a possible reversal is in the cards.
• Bearish traders want to see the SPY break down under the 50-day SMA, which could cause the ETF to drop and back test the 200-day SMA, which is an important bellwether indicator. If the SPY were to lose that level, more downside could occur and high volatility would be likely.
• The SPY has resistance above at $414.89 and $420.76 and support below at $408 and $404.

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