Daily Commentary: September 21, 2023

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SPY Broke Below the Wedge

Posted by Peter Stolcers on September 21

Here’s what to expect today and how I plan to trade the breakdown.

PRE-OPEN MARKET COMMENTS THURSDAY – This morning the /ES futures are opening 35 points lower and we are seeing follow through to the post-FOMC drop. The upward sloping trendline for the SPY that started in March was broken on heavy volume and the long red candle closed on its low. This is how we want to break support. We have broken out of the wedge formation and that was expected. We just did not know which way the market would break. The price action has been compressing and both extremes for the wedge were within striking distance.

The message from the Fed was that they are still leaning towards one more rate hike this year and that we can expect interest rates to stay “higher for longer”. They have not waivered and their stance remains hawkish.  

Now that support has been broken, the SPY 100-day MA is being tested. The SPY is slated to open below it this morning.

For a sustained directional market move we need one of two things to happen.

  1. The Fed stops tightening and inflation abates wile economic growth remains stable. That would produce a breakout and we will take out the 52-week high.
  2. A sharp decline in economic activity with potential credit concerns and stubborn core inflation. This would produce a breakdown to the 200-day MA.

Initial jobless claims came in a 201K and that is strong. Philly Fed came in at -13.5 and that was weaker than expected. The ECB raised rates last week and most EU members are raising rates 25 basis points this week.

The selling pressure is going to be pretty heavy this morning. This has the potential to be a gap and go drop, but I suggest being patient. Our best set up is a wimpy bounce to the 100-day MA with mixed overlapping candles. 1OP is in a bullish cycle. Let’s see what it can produce. We don’t want to see stacked green candles. That would suggest the bid is strong. Once this cycle runs, we want to preserve more than half of the gap and we want to see resistance before we climb back to the 100-day MA. If this scenario plays out, we will have a good entry point for shorts. I would favor the short side.

Resistance is at the 100-day MA and there is some support at $433.

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