The new year 2011 got started with a bang. Last Monday sent stocks to new two-year highs. Unfortunately there wasn't much follow through. The major indices have been consolidating sideways. That's not necessarily a bad thing but stocks remain overbought given their huge gains in December. Generally speaking the flow of economic data continues to improve. Sadly the labor market seems to be the exception. The jobs report on Friday was a huge miss.

Last Wednesday's strongly positive ADP employment report really raised expectations for the December jobs report on Friday. Analysts were raising their estimates on how many jobs the U.S. produced last month. Unfortunately, the government report was a miss. We did see job gains and the previous two months were revised higher but overall it was a disappointment. I'm surprised the market did not see a steeper sell-off on Friday. Investors could be waiting for earnings season to begin, which will start soon. Dow-component Alcoa (AA) typically kicks off earnings season and AA reports on January 10th.

At the same time we have another full week of economic data ahead of us. The wholesale inventory report on Tuesday begins the parade. Wednesday will bring the Federal Reserve's Beige Book report plus the import/export prices. Thursday, January 13th, will see the PPI for December and the weekly initial jobless claims. Friday will bring the CPI for December, Retail sales for December, industrial production, business inventories, and the Michigan Sentiment index for January. This week is going to see some big headlines with all the reports and earnings announcements.

The S&P 500 index is still trending higher and I wouldn't be surprised to see a move higher past 1280 this week. Yet like a rubber band stretched to its limit, the higher the market goes without correcting the bigger the correction could be when it finally shows up. The 1300 level is the next natural level of overhead resistance. Meanwhile on the downside the S&P 500 should find support about every 20 points at 1260, 1240, 1220, 1200. A -5% correction from current levels would mean a drop toward the 1205 area. Yet a -5% correction from the 1300 level would be 1235.

Daily chart of the S&P 500 index:

Bingo! Right on cue the NASDAQ rallied to the 2700 level. Like the S&P 500 the trend for the NASDAQ composite is still up and traders were buying the dip on Friday afternoon. The next level of resistance is probably the 2725 area. If the NASDAQ corrects lower or should I saw when it corrects lower I would watch for support near 2600 and its 50-dma. Yet that may not hold as a -5% correction from the 2700 level would be 2565.

Daily chart of the NASDAQ Composite index:

One bright spot in the market last week was the semiconductor sector. The SOX index rallied from the bottom of its bullish channel to close at new multi-year highs. The trend is still up, which is a big positive for the NASDAQ, but Intel (INTC) could change that when they report earnings on January 13th. If INTC disappoints it could be the catalyst that sparks a reversal.

Weekly chart of the SOX semiconductor index:

The small cap Russell 2000 index rallied toward resistance near 800 early last week and failed. That's not surprising since the $RUT is so overbought. This index is way overdue for a correction. We can look for some support near 765-760 but I would wait for a dip closer to the 740 area before looking for new bullish positions.

Daily chart of the Russell 2000 index:

In summary the major market indices have started moving sideways as investors look ahead to the beginning of earnings season. While the overall trend is still up odds are really good that the market could see a correction start as traders react to earnings news. Now I can't predict what's going to happen in the future. It wouldn't surprise me to see another push higher before the rally fades sometime in the next two weeks. I want to warn readers that the second half of January is not normally a very bullish time for stocks. If you're patient we could see a great entry point to launch new positions in early February.

I said it last week. If you're ready for the correction the pull back doesn't have to be scary. Instead we can look at it as an opportunity. The market will provide us another opportunity to launch new longer-term trades as we look ahead into 2011. If you're nimble enough then readers could try timing the pull back with some short-term put positions. Actually it might be a good idea to consider hedging your LEAPS portfolio with a few puts.

- James

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