Investors are ignoring economic data in favor of earnings news. The Q4 earnings season has begun and so far the results are pretty strong. Intel (INTC) and J.P.Morgan (JPM) were high-profile reports last week. INTC's results fueled strong gains in the semiconductor sector and JPM's results sparked another big day of gains for the banking stocks. Both are key sectors that tend to lead the market.

The market's trend is still up but a growing concern is that stocks are getting too overbought. On a short-term basis the SOX semiconductor index looks very overbought and due for some profit taking. Energy stocks, homebuilders, and healthcare are three more sectors that look like the SOX and overdue for some profit taking.

My biggest concern right now is that positive earnings results will fuel another last gasp higher and then when the earnings fire runs out of oxygen, stocks will reverse. It's a normal pattern that's quite common during earnings season. Of course sometimes the pattern is more obvious than others, especially when stocks see a big run up in front of the earnings news. Don't get me wrong! I'm happy to hear the healthy earnings news. We need corporate America to show an improving earnings picture that will help pave the way for future gains in 2011. We just need to be careful. Stocks commonly see a post-earnings depression. It's this depression that will fuel the market correction we've been expecting.

The S&P 500 has broken out past resistance at the 1280 level and is quickly approaching the next level of resistance at 1300. The 1300 level was resistance back in the third quarter of 2008. A nice big round number like 1300 would make a good spot for traders to decide to take profits. I know that seems simple but the big even numbers tend to be support going down and resistance going up.

Daily chart of the S&P 500 index:

The NASDAQ is soaring. The NASDAQ composite powered past what should have been stronger resistance near the 2725 level and it's already past the 2750 mark. Now we're looking at the 2007 highs in the 2800-2860 zone as overhead resistance. The tech-heavy NASDAQ is very overbought here and way overdue for some profit taking. Let's say earnings news pushes the NASDAQ to 2800. A -5% correction from the 2800 level would be 2660.

Daily chart of the NASDAQ Composite index:

Intel's earnings helped lift an already overbought semiconductor index even higher. The SOX index is looking very extended here and nearing potential resistance at the top of its bullish channel.

Weekly chart of the SOX semiconductor index:

The small cap Russell 2000 index has broken out past key resistance near the 800 level. Believe it or not the Russell actually looks relatively healthy here. This index is overbought given the five-month rally but shares are rebounding from support at the bottom of its bullish channel. The Russell probably offers the best hope that this rally has further to run.

Daily chart of the Russell 2000 index:

I really don't see any changes from my prior comments. This week is going to be one of the busiest for Q4 earnings releases. The trend is up and I would expect stocks to continue this melt up higher. It's the week after this that I would expect stocks to begin correcting lower.

- James