SPY - How low can this correction go? (short anal)

Spy broke through its support for the past three months and is now below its 200MA

This is about a 9% correction from aths, I think we see a gap down to the low 430s soon, then possibly a bounce. If SPY breaks through that support it could fill another gap to 427 area, which was its low in October. A lot of this depends on tech earnings and FOMC next week.

SPY has not been this under bought on the RSI since March 2020

My Thesis

Im expecting a 10% correction down to the 430-427 area if this week is full of bearish news/catalysts. A break of 430 could mean another gap down to the 410s. If we break below there the bull trend has been lost and we are going to have to be a lot more defensive. That is the worst case scenario though and I really do not see that happening… yet.

This is just a quick TA please feel free to light me up in the comments.


Good stuff.


I generally share your prognosis; let me add another dimension to this.

I’ve become increasingly convinced that SPY suffers from a tail-wagging-the-dog scenario where SPY and SPX options have a disproportionate impact on price movement near and at opex.

The SpotGamma folks go into it in some detail: SpotGamma Models Indicate Net Options Delta Expiration at Over $125 Billion | SpotGamma™

But the gist of it is, there was $125B in SPY options net delta expiring on 1/21. Most of these are connected to deep ITM calls, and it is assumed that it is investors who are net long on these calls. If that is the case, dealers are hedging against this by buying stocks, or going long in some other way.

What happens closer to opex? If the ITM call options are exercised, dealers need to cough up the shares, but that’s a wash because they have hedged for it already. However, if the ITM calls are not exercised, either because the call holder sold for cash or let it expire, dealers de-hedge by selling back those shares to the market. This creates a massive downward pressure, and many believe this is in large part responsible for the deep sales we saw these last few days.

If we believe this theory, then the selling should continue into Monday, and possibly Tuesday, as they rebalance their books. And to the 430 level, as you note.

Interestingly, this coincides well with the FOMC meeting on Wednesday. Assuming the FOMC doesn’t say something dumb, which they are not known to do, I think we can expect a very nice, perhaps even sharp rally starting Wed afternoon. :crossed_fingers:


Reposting here since this thread is more updated.

SPY broke through its last support of $450 with ease. I’m expecting SPY to come down to test that $426 support this week. And at the rate it is falling, that test looks like it will fall in line perfectly with the Fed talks on Tuesday 01/25 and Wednesday 01/26 because the way the fall has been occurring the last few days, I’m looking at SPY to open on Monday 01/24 at $434, run up to around $438 during the morning, and then slowly trickle down to a EOD close around $432. That would set up perfectly for that possible $426 test on Tuesday during the Fed meeting. Whether or not we get the bounce is the biggest question I have dependent on what the Fed says this week. Also a factor is that Apple and Microsoft earnings are after the Fed meetings, and with both having a heavy influence on SPY I don’t think a reversal would be potential until after this week.


What about the puts?

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Fair question. They are looking at net delta, so call delta + put delta. Call delta outweighed put delta on 1/21.

Of course, there is the added assumption that it is investors who are net long, but that seems to be a fair assumption since investor are long calls for leveraged returns, long puts for protection, Delta cancellation through spreads, and dealer hedges where the dealer is long, don’t tend to add up to what investors are up to.

We can see this in one of the graphs in the blog post where call delta (blue) is much more than put delta (green):


Do you have a thesis on the case that the FOMC comes out bullish?

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This has been discussed a few times in trading floor. No one can produce a legitimate bullish argument that could come from the meeting.


Yeah its not looking too good rn, that doesnt mean there will be a very bearish reaction though. Pretty much everyone with half a brain is expecting bad news.


+1 to the_ni’s thesis. Spy recovers just as sharply as it drops (usually). While I don’t see any particular ‘bullish’ indicator from FOMC, I do expect FOMC to be in line with what is expected, meaning it’s not bearish cause we already know where they’re leaning.

Also keep in mind most LEAPs bought last year expired, meaning people exercised their options and sold their shares for profit. A lot of long-term holds are on discount right now. I would not be surprised to see a rally start next week.


Isn’t the only bullish argument on this if the feds don’t decide to do a rate increase?


I was thinking it would a small walk-back of previous language into a more dovish take on future interest rates after the anitcipated March rate hike. My thoughts would be that it would lead to a small relief rally, and then real direction would be determined by ER of the big techs.


Interesting to see futures up heading into tomorrow. I know it doesn’t mean much, but curious to see how this will open. I’m speculating SPY will rally till noon tomorrow and start coming down, similar to Friday. Tuesday we’ll consolidate and Wednesday will be the day. Thoughts?


For this one, I believe as long as the Fed doesn’t come out super hawkish or say anything new which can be conceived as bad news that they haven’t already confirmed, SPY should see a sharp rebound for possibly a day or 2.

As of me writing this, SPY futures are green.


Not sure if this matters, but the folks on WSB think if Amazon has bad earnings it will bring the market down even more.

Cleanest inverse head and shoulders I’ve ever seen


The bullish argument would be if the Fed isn’t aggressive hawkish and communicates both the timeline and rate increase schedule.

A couple of theories: 1 25bps increase per quarter after taper completes for a total of 3, 1 50bps increase and a hold to see what that changes, with additional 25bps later in the year.

I don’t think what has been projected by a couple of banks (4+) hikes happens. While the Fed isn’t obligated to prevent the market from crashing, they definitely do pay some attention to it.



Key texts, imo:

Deutsche Bank AG is betting the diverging policy paths between the Federal Reserve and the People’s Bank of China will result in U.S. equities correcting further and China’s getting a boost, joining several other Wall Street banks in making the call.

Deutsche Bank’s views echo that of Goldman Sachs Group Inc. and HSBC Holdings Plc, whose strategists have also been calling for diversification out of U.S. stocks.

Deutsche Bank expects concerns to ease in the second half as inflation moderates, projecting the S&P 500 Index to hit 5,000 points by end-2022, or a 13% gain from Monday’s close, as the bank sees better-than-expected earnings and a 4% growth in the economy to offer support.


Wedge forming on SPY

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Would you say it’s a rising wedge?