When the Federal Reserve raised its key interest rate on Wednesday by 0.75% for the third straight time in four months in another attempt to hamper soaring inflation, The SPDR S&P 500 SPY slipped 1.74%.
But on Thursday, the ETF bounced up slightly in the premarket. The move boosted the short-term benchmark rate to the highest level since 2008, at between 3% to 3.25%.
The Fed’s intention is to cool the economy by making it costlier to secure mortgages, auto and business loans, which in turn forces people to spend less.
The 19 Fed members see interest rates peaking at between 4.5% and 5% in 2023, signaling the central bank plans to continue with its aggressive approach, which runs the risk of throwing the economy into a recession.
For the stock market, rising interest rates can negatively affect companies’ profit margins. This can cause bearish price action in individual stocks and market ETFs as traders and investors begin to expect that companies will grow at a slower pace and possibly miss earnings estimates.
Once investors see further proof that the Fed’s plan is working and inflation is decreasing over a few consecutive months, a larger rebound will likely take place. Technical traders will be watching for signs the bear cycle may be coming to an end on the SPY’s chart.
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The SPY Chart: The SPY reversed into its most recent downtrend on Aug. 16 after attempting to regain the 200-day simple moving average as support and failing. The most recent lower high was printed on Wednesday at $389.31 and the most recently confirmed lower low was formed at $388.42 on Sept. 6.
- On Wednesday, the SPY declined to its lowest level since July 14 but hasn’t yet signaled the next lower low has occurred. Eventually, the ETF will print a bullish reversal candlestick, which is likely to indicate a bounce, at least to print another lower high, on the horizon.
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- On Wednesday, the SPY printed a bearish engulfing candlestick, which indicates lower prices may come on Thursday. The second most likely scenario is that the ETF will print an inside bar batter and begin to consolidate the steep decline.
- The SPY has resistance above $380.61 and $385.85 and supports below $371.48 and at the 52-week low of $362.17.