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Tickers in this Article: DIA, SPY, IWM, QQQQ, AAPL
It was a very negative week for the stock market as the major indexes fell sharply on an increase in volume. This was the second straight week of sharp declines and it leaves the markets well in the red for the year. The fear going into earnings season was disappointment by market participants and many are left wondering if the several month rally off the bear market lows has finally run its course. All of the indexes are warning of trend reversals and traders should be very cautious at this point.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, has fallen well into its prior base after rallying to new highs early in January. Not only did the prior breakout area fail to hold as support, SPY sliced through its rising 50-day moving average and undercut most of the past two months of trading action. While it's too early to call for an end to the rally, the past two weeks of action have certainly damaged the trend considerably. One important level to watch at this point is the prior unfilled gap as possible support near $107. Another level to watch are the highs just above the small consolidation that took place after the sharp decline near $111. This area should act as resistance moving forward and could be tested on a bounce next week.

Source: StockCharts.com

The decline in the Diamonds Trust, Series 1 (NYSE:DIA) ETF also caused severe technical damage to the prior trend. DIA undercut the entire base it had been forming and is testing a prior breakout area and unfilled gap support. The trading action was very bearish as DIA closed near its lows for the week. The current level near $100 is an area to watch for possible support, as it aligns with the unfilled gap, breakout area and former pivot high. However, the preceding drop looks like it will carry DIA under these levels.

Source: StockCharts.com

The small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, also had a failed breakout, and it appears that a bull trap has been set - not only for IWM, but for all the indexes. A bull trap is a breakout that lures bulls into buying and then reverses quickly, trapping them in positions that quickly fall below their entries. As they endure more pain, the bulls will be forced to capitulate and sell their positions. By the end of the week, just about anyone who initiated a long position in IWM in 2010 was under water for the year.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) may have had the weakest performance for the week, as large cap tech stocks continue to get beaten down. Apple, Inc. (Nasdaq:AAPL) was sent lower after reporting earnings and its release of the highly anticipated iPad. As one of the Qs' largest components, AAPL weighed heavily on the ETF. QQQQ also paused near a prior gap, which could act as a near-term support area, but its momentum is clearly hinting at lower prices. The prior bottom of the established range is just under $41 and QQQQ could trade near those prices at some point in the near future.
Source: StockCharts.com

Bottom Line
One of the biggest warning signs has been the sharp increase in volume as selling intensifies in the market index ETFs. Lackluster volume was hinting at underlying weakness over the past few weeks, but this sudden increase in volume as the markets deteriorate tells us that institutions are distributing stocks at these levels. Traders would be wise to wait patiently for things to sort themselves out. The markets are in a delicate area here; they have come down too hard and too fast for prudent short sale opportunities, but they also haven't shown any signs of stabilization to tempt the bulls. Buying the dip has worked for several months, but anyone stepping in front of the decline the past couple of weeks has surely been run over. The markets may be shifting to selling any rallies at this point, and traders need to remain objective and pay close attention to what the markets are saying.

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At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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