Is the stock market nearing a significant bottom? ($SPY, $QQQ, $IWM)

In the May 30 issue of The Wagner Daily stock newsletter and on this blog post,  we stated that the S&P 500 SPDR ($SPY) and PowerShares Nasdaq 100 ETF ($QQQ), two common ETF proxies for the broad market, would likely need to “undercut” support of their respective 200-day moving averages before a significant bottom and reversal of the current intermediate-term downtrend is likely to occur in either ETF. Typically, in order for the market to reverse from a steady downtrend, a massive “shakeout” move is needed to both eliminate any remaining market bulls and to get a disproportionate number of bears into the market. Only then do reversals typically occur.

Last Friday (June 1), SPY indeed closed below support of its 200-day MA, while QQQ closed just above its 200-day MA. The stage is now set for a significant “shakeout” move below this key mark on both ETFs, at which point SPY and QQQ may become positioned for a substanial reversal.

In the May 9th, 14th, 17th and 30th editions of The Wagner Daily swing trading newsletter, we pointed out and analyzed the bearish “head and shoulders” pattern that was forming/had formed on the small-cap iShares Russell 2000 Index ETF ($IWM). In the May 9th newsletter we stated, “if the Russell 2000 loses support of the neckline at 785, the predicted selloff would be to 720. We will be monitoring the Russell carefully, as its next test of the 785 mark could result in the loss of support and a significant move lower”. On May 14th we commented that, “(a move by IWM) below Friday’s low of $78.42 could result in a break of the neckline of the head and shoulders pattern. A drop below this key market would likely result in a quick move to the 200-day MA for IWM. On May 17th we stated that, “IWM did in fact breach its neckline and now appears headed for the 200-day MA. In all likelihood, IWM will find support at its 200-day MA. Typically, when the neckline of a “head and shoulders” pattern is broken, a subsequent bounce back up into resistance near the neckline will follow. This bounce generally results in another shorting opportunity.” To refresh your mind, below is a chart of IWM from our May 17th newsletter:

The current chart of IWM (based on the June 1 close) shows the ETF is now within 2 points (less than 3%) of our originally predicted downside target for the head and shoulders pattern. Now that IWM has plunged below its nine-day low, this target may be reached quickly.

We are now seeing the first signs of capitulation in the broad-based ETFs ($SPY, $QQQ, $DIA, $IWM, $MDY), as last Friday showed the worst point loss of the year for these ETFs. Capitulation, as we define it, is wholesale selling, with investors just throwing in the towel and wanting to get out of stocks and ETFs at any price. Contrary to what many beginning traders might assume, this is actually a good sign because capitulation usually creates a tradeable, intermediate-term bottom. These bottoms must be in for a market to stage a meaningful rally. Again, nothing is set in stone and we still may need several weeks of backing and filling in a range before the broad-based ETFs are ready to launch higher. Nevertheless, because of this, we are NOT looking to enter new ETF positions at this time because the reward to risk ratio is no longer in our favor. This is not the time to chase the market lower on the short side, and we have not yet received the proper signals to initiate new swing trades on the long side either. As mentioned to subscribers in our June 1 ETF analysis, we are still in “SOH mode” (sitting on hands).

The commentary above is an excerpt from The Wagner Daily stock newsletter. Subscribers to the full version receive our exact entry and exit prices for swing trades of the top stock picks and ETF trades, access to our market timing model, and more. To get started today, sign up for your 30-day risk-free trial to our Wagner Daily stock newsletter.