With no major economic data releases taking place yesterday, the markets made way for the bears, and profit-taking pressures resurfaced as stimulus hopes loom over Wall Street. Adding to the list of reasons to lock in profit was worse-than-expected federal budget data, which showed a deficit of $139 billion compared to the previous reading of $125 billion. Our ETF to watch for today is the popular SPDR S&P 500 (SPY, A), which will fight to stay in its steep trading channel while investors digest the latest weekly employment report. Analysts are expecting for weekly jobless claims to come in at 350,000, a slight deterioration from last week’s reading of 346,000 [see The Best Dividend ETF For Every Investment Objective].
Consider SPY’s one-year daily performance chart below. SPY has been trading within a fairly well-defined steep upward-sloping channel (blue lines) since breaking above its 200-day moving average (yellow line) in mid-November of last year. As the chart below reveals, this broad-based equity ETF has a fairly predictable price pattern; for the most part, SPY has been charging higher and grinding along its upper resistance boundary while its corrections have been short-lived and confined within the channel. What’s noteworthy this time around is the fact that SPY has broken below the lower support boundary of its longer-term channel, perhaps signaling a potential trend reversal over the coming weeks [see How To Take Profits And Cut Losses When Trading ETFs].
Taking an outright short position in SPY at current levels is attractive given the lucrative profit potential, but caution should be exercised given the longer-term uptrend at hand; for those looking to jump in short, we advise using a tight stop-loss because going against the bull trend without a pre-defined exit plan can bankrupt your account [see 7 Rules ETF Day Traders Must Know].
If the latest weekly jobless claims show an improvement in the domestic labor market, the bulls should bolster SPY higher on the day; in terms of upside, the next resistance level for this ETF is around $165 a share. On the other hand, disappointing labor market data can inspire further profit-taking on Wall Street; in terms of downside, the next important support level for this ETF comes in at around $160 a share. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.