Stocks saw a bit of a reversal last week. Instead of lousy earnings and positive economic data we had positive earnings and lousy economic data. That's not entirely true. Earnings results from the first week of the Q1 earnings season weren't that bad. The only thing lousy about them was investor reaction to the news. Thankfully that has changed and traders have taken a much more bullish tone with last week's earnings data. In response the U.S. stock market rallied off its lows from Monday, April 18th. The DJIA is at new two-year highs and the rest of the major indices are hot on its heels.

The U.S. wasn't the only one seeing positive headlines. Europe saw a rally thanks to successful debt auctions in countries like Spain and Portugal, two nations that are struggling with their debt burden. There seems to be a growing consensus that it's only a matter of "when" not "if" Greece will default on its debt but thus far this pessimism for Greece has been unable to derail the rally in stocks. Meanwhile strength in Europe has fueled gains for the euro currency, which rallied to 15-month highs against the U.S. dollar.

This weakness in the dollar, which fell to new multi-year lows against a basket of currencies, has continued to fuel big gains for the commodity space. It was an historic week for gold prices, which rallied past $1,500 an ounce for the first time ever. Silver continues to see very strong momentum with the precious metal trading over $45.00 an ounce for the first time in decades. The U.S. dollar looks oversold here and a bounce could spark some profit taking across the resource and commodity names but there is no denying the trend is lower for the dollar.

Weekly Chart of the U.S. dollar index:

Daily Chart of the U.S. dollar index:

Some of the economic data last week was pretty disappointing. The weekly initial jobless claims are ticking higher and came in at 403,000. This is the second week in a row it is over the 400K mark. One of the biggest surprises was the Philadelphia Federal Reserve Manufacturing survey (Philly Fed report). Economists were expecting a pull back from a 27-year high at 43.4 in March to 33.0 in April Yet the Philly Fed fell to 18.5 in April. It was the biggest one-month drop since October 2008. One report doesn't mark a trend but the decline was shocking.

Negative economic news was completely overshadowed by earnings data. Technology stocks stole the spotlight and Apple Inc. (AAPL) garnered a lot of attention with its record-setting quarter. It seems the company can do no wrong. Analysts were expecting a net profit of $5.37 a share. AAPL delivered $6.40 a share. Revenues came in at more than $24.6 billion. The company saw a huge increase in iPhone sales and they sold every iPad they could make. Several analyst firms raised their price targets on AAPL with a few of them at $425, $495, and $612 a share. AAPL may have been the most anticipated report but the biggest surprise and the one that probably had the biggest impact on the markets was Intel (INTC). Wall Street was expecting Intel to deliver 46 cents a share on revenues of $11.59 billion. Yet the company blew away the estimate with a profit of 56 cents a share and $12.85 billion in revenues. Even more impressive the company raised their Q2 guidance. Wall Street was caught off guard and INTC gapped higher, fueling strong gains for the semiconductor sector.

At the end of the holiday shortened week the S&P 500 index had rallied off its Monday lows near 1295 close just under resistance at its April highs near the 1340 level. From the Monday low to Friday's close it was a +3.2% rise. For the record the 2011 was set in February near 1344. A close over 1344 would be very bullish and probably spark another round of short covering. In the mean time the S&P 500 should still find some short-term support near 1320 and its 50-dma. If you really wanted to get technical you could argue that the S&P 500 may have formed an inverse head-and-shoulders pattern over the last three months. A close over the "neckline" could signal a new target at 1430.

Daily chart of the S&P 500 index:

The NASDAQ Composite has seen an equally impressive bounce. The index tested technical support at its 100-dma and then managed to close over its early April highs. Yet the NASDAQ remains under its February highs. Unfortunately this index is facing some heavy resistance in the 2825-2860 area dating back to its highs from 2007.

Daily chart of the NASDAQ Composite index:

The SOX semiconductor index got a big boost from Intel (INTC) this past week. The SOX's close over its 50-dma is bullish but the index is still trading under resistance in the 445 area. The SOX has been an anchor slowing the NASDAQ down for weeks but a close over the April highs would be another bullish signal for both indices.

Daily chart of the SOX semiconductor index:

One of the most encouraging indices is the small cap Russell 2000 index. The small caps continue to move with a bullish trend of higher lows and higher highs. As long as this trend holds the market's rally should continue.

Daily chart of the IWM Russell 2000 ETF:

This coming week we'll see a lot more economic data. Monday will bring the new home sales for March. Tuesday we'll see the Case-Shiller 20-city home price index, expect a decline. Tuesday also brings the April consumer confidence numbers. The durable goods orders come out on Wednesday but the big event Wednesday is the FOMC meeting. This meeting ends early and Fed chief Ben Bernanke will hold his first ever post-meeting press conference. If Bernanke says something wrong he could spark some serious volatility in the stock market. Thursday and Friday will bring several reports but the biggest ones are the Q1 GDP estimate, pending home sales, and the Chicago PMI. In spite of all the reports, the biggest events, outside of the Fed meeting and Bernanke's press conference, will remain corporate earnings. This is one of the busiest weeks of the season with hundreds of companies reporting.

Big picture the path of least resistance still seems to be up. Yet until we see the S&P 500 close at a new high I believe the risks of a double top or failed rally pattern near resistance remain elevated. On the positive side of things, the earnings sentiment has turned a lot more bullish. Yet the deeper we move into earnings season the weaker the earnings results tend to get.

I am still concerned that the upward momentum could slow due to the "sell in May and go away" crowd. The S&P 500 is already up +6% for the year. Investors could be tempted to lock in gains now and come back in October. On the other hand the stock market seems to be growing more resilient to any outside shocks. The civil war in Libya? No problem. Violence in Nigeria, another major oil producing country? No problem. Violence against demonstrators in the middle east? No problem, although there could be a reaction to the news out of Syria with over 100 protestors shot dead on Friday.

The rising price of oil and gasoline remains a worry. Eventually fuel prices will get high enough to finally impact consumer spending. You would think this is bullish news for the oil companies but there are already worries about demand destruction as prices rise past $4.00 to over $5.00 a gallon in some parts of the U.S. I'm curious if we will hear new cries for windfall taxes against the oil companies when ExxonMobil (XOM) reports earnings this week (of course they shouldn't since most oil companies only have margins of 8% versus a lot higher margins for companies like AAPL, GOOG, and MSFT).

Last week I cautioned readers that these two weeks (last week and this week) are pivotal for the market. We should either see a breakout past resistance at the 2011 highs or a failed rally and the beginning of a new correction lower. While I'm optimistic here given last week's performance I remain cautious. Anything could happen between now and next weekend.

- James