Bull & Bear Line
The All Important 200-day SMA
In last Thursday’s newsletter “The Long and the Short of It,” I outlined two scenarios after SPY and QQQ gapped below the 200-day SMA. Either we cascade lower, similar to what we saw in 2025, or we quickly reclaim the key average within 1–2 days and move higher in a final B wave bounce, like in 2019. I was leaning toward the latter based on the analogs I’ve been working with over the past month.
However, instead of a gap up and continuation back above the 200-day SMA, Friday gave us a nasty gap-and-go to the downside. I pivoted. I stopped out of my QQQ position from Thursday, tightened stops on my remaining longs, and flipped bearish for the day. I had already purchased SPY puts on Thursday during the retest of the 200-day SMA as protection in a worst-case scenario. That allowed me to hedge while still holding shares in case we get an early-week bounce.
Thursday’s gap below the 200-day SMA was a red flag. Friday’s gap and go was that same red flag getting slapped across your face by a massive bear. In general, the probability of a bearish outcome increases significantly when we lose the 200-day SMA, and even more so when we gap below it and fail to reclaim it within a couple of days. Sometimes trading really is this simple: above the key average, you lean long. Below it, you lean short to neutral. The 200-day SMA is one of the cleanest lines in the sand between bull and bear markets.
SPY Daily Chart (Keep it Super Simple)
That said, as frustrating as it is, I can still see both paths playing out here. The risk of a sharp move lower increases the longer we stay below the 200-day. This is where traders need to stay nimble. I’ll continue outlining the most probable scenarios each day, but things can change quickly. I’ll also be updating the RLT community in real time in the swing trading room with intraday developments.
SPY Daily Chart with Both Analogs
Scenario 1: Gap down Monday, bounce, then fail at the 200-day SMA
A gap down in SPY and QQQ would strongly favor the bearish scenario, as it removes any realistic chance of a quick reclaim of the 200-day SMA. The deeper we drop, the more likely it is that a retest of the 200-day acts as resistance before the next leg lower.
That said, we’re getting short-term extended. If SPY gaps down into the $642 area (the AVWAP from the April 7th low) or lower, I’d expect buyers to step in and shorts to cover, potentially setting up a short-term bottom for a bounce. In this scenario, QQQ would likely break its major horizontal support, which SPY already broke on Friday. That opens the door for a more direct move lower toward prior all-time highs.
The small bounce back to the 200-day SMA would still qualify as a B wave bounce, just smaller than initially anticipated. I’ve overlaid a bars pattern from May 20, 2010 (red) on my chart above as a reference. The May 10 candle in that analog also came on heavy volume and pushed RSI down near 31, very similar to what we just saw. It would also closely mirror the drop we got in 2025.
SPY Daily Chart May 2010 Analog
Scenario 2: Bullish gap and go, trapping shorts and pushing higher
A bullish gap and go on Monday that closes above Friday’s candle would trap a large number of shorts who piled in during that high-volume selloff and could fuel a strong move higher over the next few weeks. This would align with the larger B wave bounce I’ve been watching for, as well as the scenario where we quickly reclaim the 200-day SMA and push higher into the 0.786 retracement of this recent drop.
RSI has dropped to around 30, which typically produces at least a short-term bounce in SPY. A 7% pullback from the highs is also a meaningful move within a standard correction. Historically, the last four instances of large volume spikes like Friday’s either marked the low or led to one final low the following day, as we saw in 2025.
I’ve included the June 27, 2016 analog (shown in green on the chart above) to illustrate what a bullish gap and go from this level could look like. That day, similar to now, price was below the 200-day, volume surged, and RSI tagged 30 before a sharp upside move followed.
While a bounce feels likely in the near term, risk remains elevated, and I still believe the market ultimately resolves lower. For longer-term, patient investors, that likely means better opportunities ahead. For active traders, there are going to be great long and short opportunities emerging this week.
SPY Daily Chart June 27th 2016
My Game Plan
If we start taking out Friday’s candle to the upside on Monday or Tuesday, I’ll begin adding bullish exposure with tight risk controls. If we gap down Monday, I’ll look to add small into that weakness with very tight stops, targeting a bounce back toward the 200-day SMA, where I would once again lean short.
It’s still entirely possible we see a waterfall lower from here, so risk management is critical, especially if you’re buying into weakness.
Thank you for in-depth view!