The SPY Falls Lower But Holds In Bullish Pattern As Debt Ceiling Talks Intensify: A Technical Analysis

The SPDR S&P 500 ETF Trust SPY gapped down slightly lower to start Tuesday’s trading session before bouncing up to reject Monday’s closing price as resistance.

The move comes amid the ongoing debt ceiling talks, where the government is attempting to divert a crisis that could come as soon as June 1.

The move was taking place on lower-than-average volume, which suggested a period of consolidation is underway. The market ETF saw decreasing volume over the last two trading days, paired with slightly decreasing prices, which caused the SPY to form a possible bull flag pattern on the daily chart.

A bull flag pattern is created with a sharp rise higher forming the pole, which is then followed by a consolidation pattern that brings the stock lower between a channel with parallel lines or into a tightening triangle pattern.

If negative news comes regarding debt ceiling discussions over the next few days, the SPY could lose support at the eight-day exponential moving average, negating the bull flag, which could cause volatility to increase.

When volatility increases, traders wishing to trade it can use MIAX’s SPIKES Volatility products. The products, which are traded on SPIKES Volatility Index (SPIKE), track expected volatility in the SPY over the next 30 days.

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The SPY Chart: The SPY dropping on lower-than-average volume is a good sign for bullish traders because it indicates consolidation as opposed to fear selling. If the ETF can remain above the eight-day EMA the pattern is likely to remain intact and traders can watch for the SPY to eventually break up through the flag on higher-than-average volume to indicate the formation was recognized.

• If the SPY closes the trading day near its low-of-day price but above the eight-day EMA, it will print an inverted hammer candlestick, which may suggest the ETF will rise on Wednesday. If heavy selling comes in and drops the SPY down under the $415 mark, lower prices could be on the horizon.
• If that happens, the bull flag will be negated but the SPY’s uptrend could remain intact. Bullish traders will want to see the ETF eventually form a bullish reversal candlestick, such as a doji or hammer candlestick, above the most recent higher low of $410.24, which was printed on May 16.
• If the SPY eventually breaks up from the bull flag pattern, the measured move is about 2.5%, which indicates the ETF could spike up toward $426.
• The SPY has resistance above at $420.76 and $426.56 and support below at $414.89 and $408.

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