Earthquakes, rate hikes, commodity spikes, and renewed violence filled the headlines last week. Yet stocks managed to hold on to their gains although the rally has definitely stalled. Investors could have been waiting for the beginning of the Q1 earnings season to begin or the markets could have been waiting to see how the drama in Washington D.C. was going to unfold.

All week long the battle over the U.S. budget raged over the airwaves. Disagreements between the Democrats and the Republicans left the U.S. government facing a potential shutdown, the first time in 15 years. In a last minute deal a shutdown was avoided when officials agreed to a $38 billion cut in spending. How much this event impacted the stock market is unknown but now that it is past it is one less thing to worry about.

Speaking of government moves, the European Central Bank (ECB) announced its first rate hike since 2008. The ECB's lending rate now stands at 1.25%. This fueled a rally in the euro and pushed it to a two-year high but more on that in a bit. While the ECB was raising rates the country of Portugal was officially asking the EU for aid. (a.k.a. a bailout). The fact that stocks did not react negatively to this Portugal news is positive but then again it wasn't that big of a surprise given the events leading up to it. The Bank of England decided to leave their rates unchanged at 0.5% with no change in their asset repurchase program.

The violence across Africa and the Middle East continues. Protests continue to grow violent in Syria. Now there are new reports of protestors in Egypt turning their anger towards the army. Nigeria, a major oil exporter, said eight people died when a bomb went off at an election office. Meanwhile the battle between Gaddafi and Libya's rebels continue. Oil got a boost when word spread that Gaddafi was targeting his country's oil fields to prevent the rebels from selling oil to generate cash to fuel their war effort. Crude oil futures soared to 30-month highs with the price of Brent crude rising to $126 a barrel and WTI oil hitting $113 a barrel.

Contributing to the rise in oil was another drop in the U.S. dollar. The ECB's rate increase lifted the euro and the dollar dropped. The combination of a falling dollar and growing worries about inflation in the U.S. kept the rally in commodities very much alive. Silver was a big performer with a new 30-year high at $40.65 an ounce. Silver is getting very close toward its all-time highs around $41.50 an ounce. Gold also rallied to new all-time highs with a move to $1,476 an ounce on Friday. Copper prices also witnessed a strong rally last week. Investors might continue to pour money into commodities if stocks reverse lower.

I cautioned readers a week ago that the S&P 500 was due for a consolidation, which might entail a sideways move. The index just spent the last week testing and failing at resistance near 1340. With Friday's decline the index looks poised to correct lower. On a short-term basis the 1320 level should offer some support but it wouldn't surprise me to see the S&P 500 dip towards the 1300 level again. Unfortunately, a pull back now will reinforce the idea of a potential bearish double top pattern.

Daily chart of the S&P 500 index:

The NASDAQ composite has a similar pattern with the index struggling near its late February highs and unable to hit its 2011 highs. The tech-heavy NASDAQ does look poised for profit taking but on a short-term basis there could be support near its 50-dma, which is conveniently near the 2750 level. If the 2750 level fails then look for support near 2700 and its 100-dma. A 50% retracement of its March bounce would pull the NASDAQ toward the 2700 level.

Daily chart of the NASDAQ Composite index:

I continue to watch the SOX semiconductor index for clues since the chips have a big influence on the NASDAQ. The SOX has been struggling with technical resistance at its 50-dma. I'm surprised the SOX didn't show more weakness since so many chip stocks were sliding lower on Friday. If the SOX closes under the 425 level again it would not bode well for the group and would suggest a another leg down (maybe toward 400 or the 200-dma).

Daily chart of the SOX semiconductor index:

The rally in the small caps has run into trouble. I cautioned readers that the prior trendline of support could now act as resistance. After a very strong bounce off its March lows the Russell 2000 (and the IWM etf) look poised for profit taking.

Daily chart of the IWM Russell 2000 ETF:

Two weeks ago strength in the transports was helping fuel the market's rally. Yet it seems the surge in crude oil prices has put an early end to the transport rally. Rising fuel costs are going to hamper any improvements in business for the airlines, truckers, etc. Even the railroad stocks are starting to see some profit taking.

chart of the Dow Jones Transportation Index:

There are a lot of reports on the economic calendar this week. The U.S. trade numbers due out on Tuesday are expected to improve somewhat. Business inventories and the March retail sales numbers come out on April 13th. The big event on the 13th will be the Fed's Beige book report. Thursday and Friday will see a rush of economic data with the PPI, CPI, Michigan Sentiment data, New York Empire Manufacturing index, and weekly initial jobless claims. Yet the biggest headlines may not be economic data but earnings reports.

The Q1 earnings season unofficially starts on Monday when Dow-component Alcoa (AA) reports after the closing bell. There won't be a lot of reports this week but there will be some high-profile names like Bank of America (BAC), Google (GOOG), and J.P.Morgan Chase bank (JPM). The following week the flow of earnings announcements will turn into a virtual flood. It will be interesting to see how many companies blame the earthquake in Japan as a disruption to their sales and production numbers. This past Thursday there was another earthquake off the coast of Japan, measuring 7.1 on the Richter scale. Our markets held up pretty well on the news but it is a reminder that Japan, one of the world's biggest economies and manufacturers, will have an impact on corporate results.

I've said it before, the U.S. stock market has already baked in strong earnings results for the first quarter. Corporations need to turn in much better than expected numbers if there are any hopes of keeping this rally alive. Otherwise the temptation to sell the news and lock in profits may be too great and the market could see a correction in the second half of April. On the other hand, if profits and guidance are better than expected it could be just the ticket we need to launch this market into another leg higher.

I would expect volatility to increase over the next two or three weeks. We may not see it in the major indices but individual stocks could see some huge swings as traders react to the Q1 earnings data. If the markets do produce a correction then it may prove to be another entry point for us but we'll want to wait for the major indices to bounce from support before considering new positions. Don't forget that we still face the end of QE2 in late June but for the moment Wall Street will be focused on corporate earnings. Be careful. I would hesitate to launch new bullish positions at this time.

- James