If you’re a fan of trading the SPDR S&P 500 Fund (NYSE:SPY), or any index vehicle for that matter, you may want to put your bearish hat on. It’s no secret that the market’s been sinking for the last few days - we’ve seen plenty of ebb and flow since March. What traders may not realize yet, however, is that index funds like the SPY or the PowerShares QQQ Trust (NASDAQ:QQQQ) just fell under some crucial support lines today. It could get uglier before things get better.

Here’s the most critical part of our bearish forecast for QQQQ or SPY though - it wasn’t exactly the charts of the exchange-traded funds that are leading us to a near-term bearish view. It was the NYSE’s and NASDZAQ’s breadth and depth that prompted the outlook.

It was only last week we pointed out that, though the market had been rising, the number of stocks participating in the rally (the ‘breadth’) was actually sinking. Moreover, the volume behind the gains (the ‘depth’) was also shrinking. Stocks were still pointed mostly higher, but underlying support for the rally was crumbling fast.

That’s how we knew SPDR S&P 500 Fund and the PowerShares QQQ Trust were essentially on borrowed time; today the price is being paid.

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As for how we interpret breadth and depth data, we explained that in detail with last Friday’s newsletter, though we explained in tremendous detail a long, long time ago. (If you’re looking for a powerful market-timing tool to add to your arsenal though, studying our technique would be time well spent.)

At any rate, a quick comparison of today’s NYSE breadth and depth chart to last Friday’s breadth and depth chart (same chart, just updated data) plotted along with the S&P 500 illustrates a bigger-picture shift to bearishness that we’ve not seen in months. All the breakdown signals are marked in yellow. Be sure to compare the two charts - you’ll clearly see the breadth and depth trends have remained bearish long enough to turn the tide and actually generate bearish crossovers on both fronts. [Note we use the NASDAQ breadth and depth data for the QQQQ’s. though we didn’t show it here.]

And just so you know, both the QQQQ and the SPY broke under the equivalent support lines that we marked for the S&P 500.

To answer the next question, yes, we know the technique gave us some errant signals in July, but the market didn’t break under a support line then. Now we’re getting a breakdown of support at the same time the breadth and depth tide has turned.

There are several ways to play this…. put options, shorting the ETFS, and others. The easiest though - if you agree that things just turned bearish - would be to tap one of the leveraged inverse index funds. Think about the ProShares UltraShort S&P 500 ETF (SDS), or the Rydex Inverse 2x S&P 500 ETF (RSW). No margin or option-approved accounts are needed for either.
If you’d like to know of any changes in our opinion of QQQQ or SPY (or if we officially recommend them as trades), be sure to sign up for our free newsletter today. It’s delivered weekly.