Why the S&P 500 ETF Is a Strong Buy for Active Investors

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  • SPDR S&P 500 ETF Trust (SPY) stock may have just bottomed.
  • Key tech earnings and price action can deliver a strong price booster to SPY stock.
  • Active investors may use extreme sell-off to their advantage.

Source: Immersion Imagery / Shutterstock

It was a slippery start to the workweek in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), and then it wasn’t. And by the closing bell on Monday with help from tech stocks, fear and price action, a much firmer buying opportunity in SPY stock is in place.

A spike in Covid-19 cases in China had the attention of SPY bulls to start the day. Shares opened down and quickly tumbled nearly 2% as the threat of a growing BA.2 outbreak rekindled fears of a recession in a U.S. economy already constrained by inflation and hawkish monetary policy.

However, U.S. stocks did finish higher Monday to reverse the session’s early warnings to take cover. Led by outsized gains in large-cap tech stocks such as Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), which report quarterly results later this week, SPY stock gained 0.58%.

Tech stocks, however, weren’t alone in helping the S&P 500 change tack; Fear and price action played a certain part as well. Now, though, let’s look at Monday’s bullish drivers and why one day may not make a trend, but it’s looking like a strong buying opportunity for active SPY stock investors.

SPY SPDR S&P 500 ETF Trust $420.86

Earnings Power Can Declaw Correction

With Covid-19 all but promising prolonged supply chain issues, or the Federal Reserve prepping Wall Street for a 50 basis point hike in May, putting too much faith in backward-looking earnings and obviously shakier-looking forecasts from SPY stock’s quarterly earnings releases this week may seem foolish. But maybe not.

If we’re to trust the more prescient forward-looking nature of price action, Monday’s bullish market reversal in the S&P 500 is hinting that foolish bulls can rule for more than one day.

Moreover, with the influential tech sector and some of the market’s largest stocks reporting, it may be more unwise to think a wall of worry put in place over the past couple of weeks can’t be supplanted in SPY stock.

Aside from MSFT stock and GOOG stocks quarterly releases, SPY stock bulls also have Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Intel (NASDAQ:INTC) and Meta Platforms (NASDAQ:FB) to gauge the state of corporate health and whether the S&P 500 is as expensive as many insist it is.

The tech earnings procession kicks off Tuesday night with Microsoft and Alphabet both reporting, and incidentally, whose price action was the most bullish among its large-cap tech earnings peers.

What Matters to SPY Stock Bulls

Source: Charts by TradingView

To say the past several weeks haven’t been extreme would be an understatement. Since March 16, SPY stock has gone from signaling a bullish confirmed rally off the market’s low from two sessions earlier, adding another 6% in less than two weeks, and then proceeding to give up more than 90% of those gains in just over three weeks.

But now, and amid the volatile price swings, the near-round turn in SPY’s price action is set up for bottoming after Monday’s bullish reversal.

With the session’s trading range cutting below and reversing back above the March cycle’s 76% retracement level, the completion of a Fibonacci-based two-step pattern (Leg AB = CD) and VIX, i.e. fear gauge hitting the historically overly-fearful 30% level, a rally that was on life support now has what it takes to be resuscitated with a potentially bullish higher low pattern.

Is it perfect? Far from it. Arguably, gap risk remains elevated in lieu of this week’s higher-profile reports from a notoriously volatile tech sector. Also, neither the daily or weekly stochastics is confirming or hinting a bottom is in SPY stock either.

Buying SPY Stock Today with Less Risk

Overall, SPY stock’s volatility all but reinforces the idea that bulls and bears — but not pigs — make money. And right now, bulls should be monitoring the instrument for a confirmed purchase opportunity.

For the more risk-tolerant investor that doesn’t mind the precision of the daily chart, a buy decision to confirm Monday’s hammer candlestick could come with bullish trade-through Tuesday.

Additionally, for managing trade risk, I’d go with a blended stop-loss beneath $422.50. That’s less than 1.5% beneath the closing print in SPY stock and looks attractive on a couple levels. For one, it allows profits larger than the accepted risk to be taken off within the price decline of the last couple weeks. In fact, the reward at the March high is more than five-fold the trade risk.

Secondly, this exit throws in the towel if Monday’s noteworthy Follow-Thru-Day (FTD) failure in SPY stock triggers a second time below $423.48, while allowing for some wiggle room. Importantly and given the extreme readings in the VIX, the expectation is that type of bearish price action shouldn’t occur unless SPY stock is in for markedly lower prices.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.