An indecisive week of trading concluded on a negative note last Friday, as the main stock market indexes fell across the board. Volume surged higher as well. After opening near the flat line, the bears immediately took control, causing the broad market to slide into a steady intraday downtrend. The Nasdaq Composite shed 1.2%, the S&P 500 1.1%, and the Dow Jones Industrial Average 0.9%. The small-cap Russell 2000 and S&P Midcap 400 indices suffered identical losses of 1.3%. Although stocks found a bit of support in the afternoon, putting a halt to further losses, the major indices still closed around the bottom quarter of their intraday ranges.

Total volume in the NYSE zoomed 53% higher, while volume in the Nasdaq rose 18% above the previous day's level. In both exchanges, trading exceeded 50-day average levels by a wide margin, and it was also the most active day of the past four weeks. As such, the substantial losses on sharply higher turnover caused both the S&P 500 and Nasdaq Composite to register a bearish "distribution day," indicative of selling amongst mutual funds, hedge funds, and other institutions. In fairness, a considerable portion of the volume increase could be attributed to last Friday being monthly options expiration day. Nevertheless, there's a good chance turnover would have been higher regardless.

In the first week of the new year, stocks moved modestly higher. But the second week of 2010 was marked only by day to day volatility and indecision. Last week, for example, the Dow Jones Industrial Average chopped around in a range of 1.5%, before finishing the week 0.1% lower than where it began. The S&P 500 and Nasdaq Composite were also volatile, but lost more. Now, all three of the major indices are sitting right at short-term support of their 20-day exponential moving averages (EMAs).

On numerous occasions over the past several months, the 20-day EMA has neatly provided the necessary price support to enable the major indices to continue their uptrends. Below, on the daily chart of the Dow, notice how many times the index has quickly snapped back, after just a one-day "undercut" of its 20-day EMA. The daily charts of the S&P and Nasdaq are similar:



Although each of the major indices are still in positive territory for 2010, it's notable that nearly all of the broad market's advance is now the result of gains registered only in the first hour of trading, on the first day of the new year. On the hourly chart of the S&P 500 below, the dashed horizontal line marks that level, where the index twice found support just above that price last week:



As with the Dow and Nasdaq, last Friday's low in the S&P 500 correlated to support of its 20-day EMA. That moving average is not shown on the hourly chart above, but it now converges with the horizontal line at the 1,131 level. Therefore, last week's low of 1,131 now becomes a key area of short-term support to monitor in the coming days. Last week's respective lows in the Nasdaq and Dow are equally important, as a convincing breakdown below support of those lows (the 20-day EMAs), in any one of the indexes, could spark a broad-based wave of selling in the near-term. If that happens, look for the 50-day moving averages to act as the next major level of price support.

As quarterly earnings season kicks into full swing, the tone of this week's trading is likely to be driven by the market's reaction to the next batch of corporate numbers. It seems as though a lot of positive expectations have already been built into the prices of equities, so any shock to the system could have sudden, negative repercussions to prices. However, a retracement to the area of the 50-day moving averages would actually be positive for the longer-term health of the market, as it would allow stocks to digest their sizable gains of 2009. Furthermore, a decent pullback would also provide us with new ETF buy setups, such as those we've been discussing and monitoring for a pullback over the past week. But if a substantial pullback still doesn't come, we'll continue to selectively take quick momentum trades, with tight stops and shorter than usual holding times.

Open ETF positions:

Long - UUP
Short (including inversely correlated "short ETFs") - EEV

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.