SPDR S&P 500 ETF Trust (SPY) Forecast: Waiting for the breakout ahead of Nonfarm Payrolls

The main equity indices closed lower on Thursday as investors likely took some chips off the table ahead of Friday's jobs report. One of the biggest numbers of the month, the jobs report, takes on added significance. Talk of a Federal Reserve pivot has increased lately as financial systems look at the point of collapse in some regions. We have already seen the Bank of England step in to rescue the gilt market, and we have had the UN of all bodies wanting the Fed to slow the pace of its interest rate hikes.

SPY news

This week has been notable for the continued hawkish commentary from most Fed members that took to the airwaves. It remains to be seen how strong that conviction is after this week's jobs reports and next week's CPI. Both are expected by markets to show signs of improvement, and investors have rushed back to risk assets this week. That has seen some stellar gains across markets, so can these be continued? Turning to the day ahead, payrolls are expected to show a gain of 250,000.

An ideal scenario is probably a number closer to 200,000 in my view, as that will set the Fed pivot talk into overdrive. Currently, a Fed pivot is assumed to be good for equities as it means lower interest rates. The reasons for a Fed pivot are likely to mean a deep recession, but equities are prepared to overlook that for now.

September has a strong history of missing to the downside from the research I have read recently, so we may be set up for this rally to continue. That appears to be the pain trade, and markets do best in inflicting pain on the maximum number of participants. CTA and trend-following positioning is low and will need to change if we begin to squeeze.

Ahead of earnings season, there is also likely to be the feeling that all the bad news is out of the way before earnings season even begins. We have had FedEx (FDX), Nike (NKE) and now Advanced Micro Devices (AMD) all with terrible reports out, and Samsung overnight was also poor. Sentiment and positioning among equity investors remain terrible, which always pushes the risk-reward scenario toward a countertrend squeeze rally. That is not to say the longer-term view looks challenging, but the risk-reward in my view remains skewed to the upside.

SPY forecast

A lovely bounce from the 200-week moving average can be seen, and the Relative Strength Index (RSI) was also oversold. Now $373 remains the pivot. A move higher will then target $389. Breaking the pivot at $373 opens another new low for the year below the 200-week moving average at $359. 

SPY daily chart