The stock market continued to slide on this holiday-shortened week. Most of the indexes sliced right through likely support areas and after eight consecutive down days, they are quite oversold. The recent shift in market sentiment was abrupt, and underscores how important it is to remain disciplined as traders. Despite many individual stocks starting to come alive in October, the stock market still reversed and has likely trapped many bulls.

The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, gapped under $121 and its 50-day moving average in one fell swoop. Beyond this, it never even seriously attempted to rally back over these levels as selling pressure continued through the end of the week. SPY is now quite oversold and is pressing into the prior congestion zone formed during August as SPY attempted to stabilize after the mid-summer freefall. While a bounce can be expected soon, the steepness of the recent declines is suggesting that it will take much more time before SPY will be ready to challenge its summer highs.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF also started the week by slicing through a possible support level near $116-$117. While DIA did pause near its 50-day moving average, it ultimately caved in and dropped under the key moving average on its way towards $112. DIA is also trading near the middle of the range it established after the late summer market drop and should be close to a bounce. The $116-$117 area remains important, as it will likely now act as resistance again. (For more, see Interpreting Support And Resistance Zones.)

The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF, gave an important clue last week when it cracked under a key support level ahead of its peers. QQQ has been acting as a leader since the markets began to rally a couple of years ago, and any behavior that deviates from its peers should be closely watched. The next easily definable support area for QQQ lies near $50, and QQQ may be headed there for another test of key support. Another key area to watch is the gap left above near $55. This level should act as resistance in the case that QQQ attempts to bounce soon.

The iShares Russell 2000 Index (NYSE:IWM) ETF also acted poorly this week as it fell under a support level near $71. Just like its peers, it also continued lower breezing right by its 50-day moving average. The $65 level may be one possible support area, after holding as support through August and September.

The Bottom Line
While the markets have not necessarily broken down, this week's action was certainly not promising. The markets didn't even pause near their prior breakout levels, instead persistently heading lower. The markets are very oversold, and a bounce should be forthcoming pretty soon. However, traders will need to remain very cautious here, as the markets can theoretically take many different paths here. A flush out can't be ruled out, and oversold markets can easily become more oversold. That being said, the markets are approaching a seasonably strong period, and any bounce in the markets could ignite a year-end rally. Hopefully the next week will provide more clues. (For more, see Technical Analysis: Introduction.)

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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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