As market conditions continue deteriorating, many traders and investors are now seeking guidance to help them determine where the S&P 500, Nasdaq, and Dow Jones may find support, as well as the levels where these major indices are likely to encounter resistance when eventually attempting to rebound. As such, this article will provide you with a clear, objective look at the technical chart patterns of broad-based ETFs that track the S&P 500 ($SPY), Nasdaq ($QQQ), and Dow Jones ($DIA). Let's start by analyzing the daily chart of the S&P 500 SPDR ($SPY), a well-known ETF trading proxy for the benchmark S&P 500 Index:



Until yesterday, it would be fair to say that the chart pattern of SPY had not yet convincingly broken down. Rather, the index had been clinging to key intermediate-term support of its 50-day moving average. Furthermore, the "hammer" candlestick pattern that formed when on October 22 was slightly encouraging because a bullish reversal bar that coincides with an "undercut" of an obvious support level often precedes a rally. But not this time. The mere fact that SPY opened below the October 22 low in yesterday session was quite negative. Now, the 50-day moving average should act as a significant resistance level on any subsequent rally attempt. The prior lows from the previous trading range (the dashed horizontal line) will also act as a substantial area of resistance. New traders need to know the following basic tenet of technical analysis: a prior level of support becomes the new level of resistance, after the support is broken (and vice versa).

Although it is bearish that SPY now has a plethora of overhead supply and technical resistance levels to contend with, one potential ray of sunshine in the storm clouds is that SPY is coming into major support of a year-long uptrend line. This is annotated on the longer-term weekly chart of SPY below:


The longer a trendline has been in place, the more likely the trend will remain intact. Therefore, it is positive that SPY is now coming into support of an uptrend line that began with the lows of October 2011. If SPY is looking for an excuse to bounce from current levels, this would fit the bill. HOWEVER, with our market timing model now in "sell" mode and the daily chart pattern starting to look at bit ominous, this does not mean swing traders should be looking to step in and start buying stocks. Rather, we view any stock market bounce from here merely as an opportunity to dump any badly losing positions one may still be holding (shame on traders who failed to honor their protective stops). Furthermore, one could be looking to establish new short positions when the broad market starts bouncing into its new resistance levels, which would thereby create positive reward to risk ratios and low-risk entry points for selling short and/or buying inversely correlated "short" ETFs.

For the sake of brevity, we will skip analysis of the Dow Jones SPDR ETF ($DIA) because both its daily and weekly chart patterns are quite similar to SPY above (broke down firmly below its 50-day moving average yesterday, and is also coming into support of its year-long uptrend line). Instead, let's jump to the daily and weekly charts of PowerShares QQQ Trust ($QQQ), a popular ETF that tracks the performance of the tech-heavy Nasdaq 100 Index (which has been trading in similar fashion to its sibling, the Nasdaq Composite Index). Our annotated daily chart of QQQ key is below:



It takes only a quick glance at the chart above to notice that QQQ began breaking down well ahead of SPY, and is technically in much worse condition. In the October 8 issue of The Wagner Daily (and on this blog post), we provided five technical reasons we felt stocks were poised to move lower in the near to intermediate-term. One of those five reasons was the formation of a bearish "head and shoulders" pattern that was forming on the chart of QQQ key to at the time. Just one day later, QQQ began following through on the bearish pattern by slicing through its 50-day moving average. Technical analysis states the projected decline of a "head and shoulders" pattern is equal to the distance between the top of the "head' and the "neckline." That equated to a projected drop of approximately 4.2% at the time of our initial October 8 warning. Since then, QQQ has fallen 4.4%, which means it has fully followed-through on the projected decline of its "head and shoulders" pattern.

As for support on QQQ, the index is now approaching major long-term support of its 200-day moving average, which is just below yesterday's low. The last time QQQ came into support of its 200 day MA was at the beginning of June 2012, which marked the low of the correction that spanned from March through May of 2012. As for the weekly chart pattern, QQQ is now trading just below its one-year uptrend line (similar to the one shown on the weekly chart of SPY). However, support of its 200-day moving average is at least equally as important as a one-year uptrend line.

As the chart patterns above clearly illustrate, we are now dealing with a stock market in which sentiment has clearly reversed over the past several weeks. As it is designed to do, our rule-based system for market timing provided the requisite signals for us to close our long positions (other than ETFs with low correlation) and get out of the way before downside momentum really started kicking in. Now that the change to an overall bearish sentiment has been confirmed, we are now patiently waiting for an eventual bounce in the broad market that will provide us with ideal, low-risk entry points on new short positions or inversely correlated "short" ETFs. In the coming days and weeks, we will be providing newsletter subscribers with our detailed entry, exit, and target prices of any swing trade setups that qualify.

Deron Wagner is the Founder and Head Trader of both Morpheus Capital LP, a U.S. hedge fund, and MorpheusTrading.com, a trader education firm.