After several weeks of gains it looks like the rally is finally running out of steam. The tone of trading has changed and investors are starting to sell the news as more and more corporations report earnings. This development is not surprising. As a matter of fact we've been expecting it. Granted, one down week does not make a trend but don't just look at the major indices. I spent hours this weekend looking at hundreds and hundreds of stocks. It certainly looks like the correction has begun.

This week we'll see another wave of economic data. The Consumer Confidence numbers for January and the Case-Shiller home price index come out on Tuesday. Analysts are expecting a -1.3% decline in home prices. Wednesday brings the latest new home sales data (for December). Yet the big event will be the conclusion to the two-day FOMC meeting. No change in interest rates is expected. As is usually the case investors will be eager to dissect the Fed's press release for any hint of a change in their bias, comments on the health of the economy, and the future of any quantitative easing programs.

On Thursday we'll get the latest durable goods report and the pending home sales data. Then on Friday we'll see another big announcement, this time for the advance Q4 GDP estimate. Economists are expecting +3.8% growth last quarter. Any disappointment there would definitely be a surprise and bad news for stocks.

I was expecting the S&P 500 to run into resistance at the 1300 mark but the rally stalled at 1295. The overall trend is still very much up so all my talk of a potential top could be a little premature until stocks see some follow through lower. When stocks correct, and they will, I'm looking for potential support at 1250 or the 50-dma for the S&P 500.

Daily chart of the S&P 500 index:

The NASDAQ is looking a bit weaker here. Big declines in stocks like AAPL, GOOG, and FFIV all played their part. The NASDAQ composite has broken its first level of technical support at the 10-dma and actually failed there on Friday. The larger trend is still up but I think the correction has started. I am expecting some short-term support at 2650 but would probably look for a drop toward the 2600 area.

Daily chart of the NASDAQ Composite index:

The sell-off in the NASDAQ could accelerate if the SOX semiconductor index breaks down any further. In spite of the declines last week the trend for the SOX is still up. I don't expect this bullish channel to hold so watch the SOX as an early warning signal for the NASDAQ. There is potential support near 420 but I would look for a decline closer to 400.

Weekly chart of the SOX semiconductor index:

What a difference a week can make. Last week the Russell 2000 ($RUT) was probably the healthiest looking index of the big three. Now it's the weakest. The correction has already begun for the small caps and the $RUT hs broken support near 780 and its trend of higher lows. I would not be surprised to see the $RUT bounce near 765 but any rebound is probably temporary. I'd love to see a dip toward the 740 area, which we could use as a new bullish entry point (but I might be day dreaming to think the $RUT will pull back that far).

Daily chart of the Russell 2000 index:

Looking at the big picture I don't see any changes. The S&P 500 broke a seven-week winning streak. Some profit taking here would be healthy and normal. Stocks will see a little post-earnings depression over the next few weeks. Speaking of earnings we are going to hear a lot of them this week. We should see this pull back as a positive event. It means that in the next two or three weeks we could see our next entry point to launch new long-term LEAPS positions.

- James