Is The Temporary Top In For The SPY?

At 2:30 a.m. ET Thursday morning, bearish volume picked up on the S&P 500 e-mini Futures and by 6:15 a.m., ES1 had fallen over 70 points.

At about the same time the Volatility S&P 500 Index (NYSE: VIX) began to spike and by Thursday morning was trading at over $20.

Many traders had become comfortable playing the market from a bullish perspective over the last 11 trading days because the VIX was trading under the $20 mark. A global rise in the COVID-19 Delta variant may have spooked investors overnight.

The variant, which is highly transmissible, has become the dominant strain in the U.S. and is skyrocketing in states with lower vaccination rates. The Delta variant is now accounting for 95% of all cases in the U.K. and on Thursday Japan’s Prime Minister Yoshihide Suga declared a state of emergency for Tokyo due to rising cases of the variant –just two weeks before the Olympics are slated to begin.

ES1 had been flashing signs for a few days that the temporary top may be in, however, and traders often find that news events can be found to align with technical analysis.

What Is ES1: Traders can use futures contracts to provide the expected future value of the SPDR S&P 500 (NYSE: SPY) when the regular trading market is closed. ES1 is a mini contract that tracks after-hours market movements. The E in the ticker symbol stands for ‘electronic’ and many traders prefer to track ES1 as opposed to the larger futures contract (NYSE: SP) because ES1 has much higher liquidity.

See Also: 3 Reasons To Stay Bullish On Stocks In The Second Half Of 2021

The ES1 Chart: Last Friday, ES1 made a new all-time high of $4347 and on Tuesday wicked off the level as resistance. On Wednesday, ES1 was able to bust through the area and make a new all-time high but it stalled out at $4352 and bullish momentum didn’t provide follow-through.

By early Thursday morning, ES1 was unable to bust through the level and, at one point, had fallen 1.7%. The action over the past trading days has formed a bearish double-top pattern and possibly even a quadruple top pattern in mini futures.

Since late March 2020, when the markets began to rebound from the initial panic brought on by the pandemic, a lower trendline has become chartable on ES1 and futures have wicked from the line on several occasions during pull-backs. Bulls will want to see ES1 continue to hold above the trendline as support.

ES1 was trading slightly below the eight-day exponential moving average (EMA) but holding the 21-day EMA as support. This indicates there is some indecision in sentiment for the short term. ES1 is holding over support of the 200-day simple moving average (SMA), which indicates overall sentiment in the S&P 500 remains bullish. The 200-day SMA is closely aligned with the support of the ascending trendline which makes the level quite important.

Bulls want to see another ‘V shape’ recovery like what was witnessed on June 18 and 19. If bulls buy the dip and ES1 can regain the $4,294 level as support intraday it could make its way back to all-time highs where it will find resistance.

Bears want to see continued pressure in ES1 for it to lose support of the upper sloping trendline and the 200-day SMA. There are important levels of support below at $4,246, $4,213 and $4,190.