The SPDR S&P 500 ETF (SPY) stock continued rising and is sitting at a record high as the strength of the equities market accelerates. The fund was trading at $605 on Monday, bringing the year-to-date gains to about 27%.
Other related funds like the Vanguard S&P 500 (VOO) and the iShares S&P 500 (IVV) have also soared this year.
Technical analysis points to a future SPY ETF reversal
The SPDR S&P 500 ETF has been in a spectacular rally for decades, which explains why it has become one of the most popular funds in Wall Street.
As a result, the fund has constantly remained above the 50-day and 200-day Exponential Moving Averages (EMA), meaning that bulls are in control.
However, historically, the ETF has seen periods of bear markets, as we experienced in 2022, when it crashed by over 20%.
There is a risk that the fund will have a strong bearish breakout, possibly in 2025. That’s because, as shown below, the fund has been forming a rising wedge chart pattern, which is a popular bearish reversal sign.
This pattern is made up of two ascending trendlines that seem to be converging. The lower line connects all lower lows since August, while the upper one connects the higher highs.
In most periods, a rising wedge pattern results in a strong bearish breakdown, especially when the two lines near their confluence level.
There are other signs that the SPDR S&P 500 ETF will suffer a harsh reversal. For example, the MACD indicator has remained above the zero line but it is moving sideways, a sign of a bearish divergence.
The Relative Strength Index (RSI) indicator has also moved sideways below the overbought level. Also, the stock was trading at the strong pivot release of the Murrey Math Lines indicator.
Therefore, there is a likelihood that the S&P 500 index will suffer a harsh reversal, probably in 2025. If this happens, it will likely drop to the bottom of the trading range at $545.
On the flip side, a move above the key resistance level at $640 will point to more gains, possibly to the extreme overshoot level of $656.
Catalysts for an S&P 500 index reversal
There are a few potential catalysts for a bearish reversal of the SPDR S&P 500 ETF.
First, Donald Trump has vowed to be tough on trade and has already threatened to impose tariffs on imports to the United States from its key trading partners like China, Mexico, and Canada. If he goes ahead with these plans, there are rising odds that he will trigger a trade war that will impact most companies in the S&P 500 index like NVIDIA and Walmart.
Second, Trump has also vowed to be tough in China, the second biggest economy in the world. He could do that by imposing tariffs and trade restrictions as he did in the last term. These actions could hurt more American companies that do a lot of business in the country.
Third, there are concerns about the valuation of American companies, which could trigger a reset. The forward one-year PE ratio for the S&P 500 index is 22, higher than the five-year moving average of 19 and higher than the ten-year average of 18.
Additionally, the fiscal state of the US economy is major risk as public debt has now surged to over $36 trillion. Analysts expect that the figure will be over $40 trillion in the next few years. Worse, Trump has vowed to cut more taxes, a move that will lead to more deficits over time.
To be clear: a drop in the SPY ETF stock will be brief as it has done in the past decades. Historically, the index drops and then bounces back. We saw that during the COVID-19 years, the Global Financial Crisis, and the dot com bubble.
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