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.

A day like Friday leaves most people wondering if there were any stocks that managed to make gains to close out the week on a positive note. As we’ve always said though, a really great stock will find a way to overcome a bearish tide…. perhaps a stock like Heathrow Natural Food and Bev. Inc. (OTC:HRNF), Western Lithium Corp (CVE:WLC), or Canada Lithium Corp. (CVE:CLQ). Two of those three are up today, after all, resistance to the selling we’re seeing in most of the market’s corners.

Is that strength something investors need to pay particular attention to? Maybe. Take a look.
Heathrow Natural Food and Beverage was actually mentioned to us by one of our readers as a suggested idea. He wrote….

Is anybody in your company tracking HRNF [Heathrow Natural Food and Bev. Inc. (OTC:HRNF)]. It is reporting great growth and is expecting to soon introduce a chewing gum that has antitoxins.
Regards

(name removed by editor)

Thanks for the e-mail. (By the way, we remove any information that might be identifying. If you’re ok with not being anonymous, feel free to post a comment ion the blog or at the community.) To answer the question, no - nobody’s following Heathrow. We’ve never even heard of it. Though a little off-the-wall in terms of product, it sounds interesting.

We’re going to open HRNF up to our readers and see if they have any thoughts or important information. If you’ve got something worthy to add to that discussion, please chime in below.

As for Canada Lithium and Western Lithium, they were also suggested by a reader e-mail…

Hey, I’m (name removed by editor). Check out Western Lithium Corp (WLC) on the tsx and Canada Lithium Corp (CLQ) also on the tsx (Toronto exchange). I’m sure you know the transportation world and energy storage infrastructure will continue and eventually be completely taken over by lithium and ultracapacitors. These companies, if you do your research, have great leaders, actual proof of high quality deposits and advanced stages of development, and the empirical proof of a growing industry. I’m only a 21 year old (school name removed by editor) student. I do my research, make sound decisions, and never take an irrational risk. I’ve put money and will bank on these two cheeaaaaaappppppp companies that will control the North American lithium supplies. PUSH IT BABY PUSH ITT!!!!!!!

(name removed by editor)

P.S. Please don’t make this a pump and dump. These are two great companies with cash and a future.

Thanks for the e-mail and ideas. We don’t follow many Canadian stocks, though you’re right - Lithium is the future, though it’s a distant future. For that reason, maybe we should look towards our northern neighbors for opportunities, since there are next to no U.S. stocks with that kind of exposure.

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Anyway, one thought - you do realize the “PUSH IT BABY PUSH ITT!!!!!!!” and the “Please don’t make this a pump and dump.” are totally at odds with each other, right? [I’m just having a little fun with you…. I know what you mean by it.]

We’ll do the same for Canada Lithium and Western Lithium that we did for Heathrow Natural Food. Since we don’t know much about them, we’ll open the topic up to our readers and solicit their help. Does anybody out there have any pros or cons regarding either company?

It should go without saying, but just in case….blatant self-promotion and disrespectful comments will be ignored; legitimate ones will be approved.

With that, the floor is open.

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Figures. We felt fortunate to find NeoMedia Technologies (NEOM) at the beginning of its upturn, attracted by its well-paced move higher as of October 14th. Rather than just quietly ride the trend higher though, today’s 40% surge is forcing us to turn our intermediate-term trade into something with a much shorter duration. Yes, that’s right - NeoMedia technologies is overbought, and ripe for a short-term dip. Here’s how we’re handing it….

First and foremost, we’re not complaining. We suggested NeoMedia shares on the 14th when they were trading at $0.142. At the current price of $0.20, our readers are up about 40%. We’ll take it.

Our grumbling is simply that the chart’s over-extended now, which puts the entire uptrend at risk. Sustainability is the key. The pace we saw then was sustainable. Today’s pop, however, isn’t sustainable, and may end up acting as a ‘final hurrah’ for this leg of the chart.

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————————————————On the flip side, the rising support line is still intact, and the volume is clearly favoring the bulls. In other words, don’t freak out just yet.

We advocate the hedged approach…. sell some now and lock in a short-term profit, but keep the rest just in case NEOM settles down, retest that bullish support line, and resumes its uptrend again. Just think of it as the best of other worlds. Of course, if NeoMedia Technologies shares slip under that support line, that’ll be the time to dump the remainder of what you own and enjoy the small profit on the entire trade.

All in all it’s not what we were hoping would happen, but that’s trading - a small win that could have been a big win is sure better than a loss any day of the week. If we continue to find enough of these high-potential, low-risk trading setups like the one we found with NEOM, enough of them will pan out to our advantage.

The best and only way to get our official trading alerts, for free and in real time, is to sign up for our free e-newlsetter. Don’t worry…. it’s only delivered a couple of times per week, and we only need your e-mail address.

Though we strictly adhere to a policy of not offering individual advice (for regulatory as well as feasibility reasons), in cases where sharing our thoughts with everyone is educational and broad in its scope, we don’t mind answering some questions with our opinion…. like the one we got today regarding Spectrum Pharmaceuticals (SPPI). Our reader writes….

I OWN SPPI STOCKS AND FIND IT PIERCED THROUGH YOUR BOTTOM OF 4.78! ON CHARTS. WHERE NEXT? — ‘IYEEKS ‘ AS YOU SAID!

Thanks for the note. A little background work may be in order for everyone to fully appreciate our answer. The discussion the note references was actually posted last Friday after SPPI broke under one key Fibonacci retracement line, and tumbled (gapped, actually) all the way to the next one at $4.80. If the $4.80 one broke as well, then Yikes! indeed.

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Well, yikes. As you can see from the chart below, the floor at $4.80 broke in the meantime, and Spectrum Pharmaceuticals shares are now trading at $4.67.

As far as the ‘where next?’ is concerned, we don’t even really have a strong idea yet. The fact that SPPI can’t get back above the Fibonacci line at $4.80 isn’t a good sign… that’s for sure, but it’s still working on getting back over the hump.

From my perspective, it’s too soon to give up on Spectrum simply because (1) you’ve already ridden it this low, and (2) it’s trying to recover. If SPPI rolls over again though, and makes a low under yesterday’s low of $4.35, that’s likely to be a strong sign that things are poised to get much worse before they get better. In the meantime, I’d say the chart’s in limbo.

The bigger lesson that Spectrum Pharmaceuticals has taught us here is simply to use and be aware of Fibonacci retracement lines. They’re not perfect, but when used in conjunction with other tools they can really improve your trading odds.

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As we’ve said before, we’re open to hearing any of your legitimate trading ideas. Just let us know by sending them in with a reasonable argument. We got one such e-mail today from a reader who made a pretty valid case against (bearish on) Scotts Miracle Gro (SMG). He writes…

I have alot of respect for your work and would like to bounce a trading idea off you. I believe that Scotts Miracle Gro (SMG) is a good short candidate. They report earnings before the bell on Oct 26. Let me make my case:

• (1) Weather: unseasonably cold weather early in the fall should not help their business late in quarter or guidance going forward
• (2) Earnings estimates are very optimistic going forward
• (3) Last quarter, the company raised guidance half way through - nothing this quarter
• (4) Stock has underperformed market rally for last month
• (5) Heavy insider selling as of late
• (6) Short interest has significantly decreased since last quarter
• (7) Volume has significantly dried up last month or so

Thanks for the note. All of your arguments seem solid. While I don’t know if items 1 through 3 have much bearing (they might - I just don’t know), I’m totally on board with ideas 4 through 7…… #4 and #7 in particular. A chart of Scotts Miracle Gro will easily illustrate what’s going on here.

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———————————————————————-As you can see, SMG - though up a little over the last two weeks - has indeed failed to rally with the rest of the market. You can also see that volume has been getting thinner and thinner on the way up…. a major red flag.

At the very least, volume should stay steady during rallies, or ideally, increase as the rally progresses. In the case of Scotts Miracle Gro though, the buying volume (blue bars) have been getting shorter and shorter. Eventually, there won’t be enough buyers to even keep the stock propped up at current levels, let alone higher levels.

The only thing we’ll add is that SMG actually hasn’t started to unravel yet. And, as we all know too well, what ’should be’ and what ‘is’ can be tow different things for a very long time. For that reason, we’d simply suggest waiting for Scotts Miracle Gro shares to slilde under one of the several possible support lines (which we plotted) before turning this idea into a trade. That’s just my two cents.

As far as our opinion of the idea though, I think this reader found a great setup.

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