The tone of trading last week seem to grow a lot more cautious even though the numbers weren't that bad. The S&P 500 fell less than three points for the week. The small cap Russell 2000 and the NASDAQ composite both eked out fractional gains. Yet market commentators seem to take a bearish view of last week's action.

Has the buy-the-dip crowd lost their nerve? Or is this merely another week of consolidation before stocks resume their bullish trend of higher highs and higher lows. If you wanted to be picky about it the market's major averages could probably see a decline toward their rising 100-dma and still not break the bullish pattern of higher lows. If this happens technical traders could argue the structure of the market was changing since this would create a three-week trend of lower highs and lower lows.

There have been growing concerns that the U.S. and global economy has hit a "soft patch". What I find interesting is that this past week saw generally positive economic data but this failed to fuel any market gains. The consumer sentiment numbers for April rose 2.6 points to 72.4 after a sharp drop to 67.5 in March. Economists were only expecting a rise to 69.5. Rising consumer sentiment numbers are supposed to reflect stronger consumer spending.

Elsewhere the Consumer Price Index (CPI) was generally benign. Analysts were expecting a +0.8% rise in the headline number. Yet the April CPI came in at +0.4%. The core CPI, which excludes the more volatile food and fuel components, only rose +0.2%. Inflation remains relatively tame in spite of the volatility across the commodity sector. Speaking of commodities, the rally in the U.S. dollar continued for another week, which puts pressure on commodities that are traded in dollars. Another issue is concern that China's economy might slow down too fast (a recurring concern) and thus demand for commodities could ebb. On Friday the Chinese government raised bank reserve requirements again since they are trying to tap the breaks on their red hot economy.

Another challenge for investor sentiment is the Eurozone. I warned readers last week that Europe's sovereign debt issues and Greece would remain an issue. It looks like Greece is struggling to make its new debt payments in spite of the bailout. Now the Eurozone is trying to figure out what the next step is to avoid a meltdown. There are a lot of European banks that hold billions in Greek debt and a default would have serious repercussions across the region. Last week there were rumors that Greece wanted to leave the Eurozone, which would put the whole concept of the Euro area at risk. 17 of the 27 European Union members make up the euro zone, which uses the euro currency. If one leaves it could start a domino effect. Concerns over Greece and Europe have sent the euro currency plunging. This move is boosting the dollar, which is having a negative impact on commodities. Expect more headlines this week. There is a meeting on Monday for Eurozone finance ministers. I'm sure they grow tired of Greece being the main topic.

Chart of the Euro ETF:

Chart of the U.S. dollar index:

A week ago the S&P 500 closed near support at the 1340 level. Once again the index closed just a few points off this level. As you can see in the daily chart below the S&P 500 bounced from its 50% retracement of the late April rally. Traders might be worried that the sideways action last week has done little to cancel what appeared to be a bearish reversal in the first week of May. While the index might see more selling the long-term trend is still very much higher. On a short-term basis a close under 1330 would be bearish but we can look for support near 1320. If the 1320 level breaks then cross your fingers and hope the 100-dma acts as support. Otherwise we're looking at a dip toward the 1300 level.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ managed a very minor gain after a week of moving sideways. We shouldn't be that surprised to see the NASDAQ consolidate sideways near these resistance levels. Little has changed from a week ago. The 2800 level should still offer some support. If that fails there is the 50-dma and 100-dma near 2750. Either could be a buy-the-dip entry point for short-term traders. Now a close under 2750 would be a lot more ominous. There's no harm in taking a step back to wait and see where the index will bounce.

Daily chart of the NASDAQ Composite index:

One chart I am worried about is the small cap Russell 2000 index. Thus far the $RUT still has a bullish trend of higher lows and higher highs. Unfortunately the first week of May produced a bearish reversal pattern. The sideways consolidation this past week has done little to alleviate the potential reversal lower from earlier in the month. Normally a bullish engulfing candlestick pattern needs to see confirmation, which hasn't happened yet. The problem is that when the $RUT does break down it could move lower really fast. The small cap index is currently testing technical support at its 50-dma. Plus it's testing support at one of its long-term trendlines of higher lows. A breakdown here would look very bearish! If you're feeling pessimistic you could argue the $RUT is building a bear wedge pattern on its daily chart. There is reason to be cautious on the small caps.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

Another chart I want to point out is the yield on the short-term 13-week treasury bonds. Sometimes big money likes to park their cash in short-term treasuries for "safety". A quick glance at the chart below and you can see that the yield on the short-term treasury has been falling for more than three months. Yields fall as the bond rises. This trend of lower lows started when the S&P 500 first peaked back in February this year. How scared of the stock market do you have to be to buy short-term treasuries with a yield this close to zero? Someone is scared to have their money in stocks. The first time the short-term yields got this close to zero was during the 2008 bear market in stocks.

Daily chart of the Short-Term Treasury Yield:

Weekly chart of the Short-Term Treasury Yield:

Looking ahead we have another full week of economic data. Some of the highlights will be the New York Federal Reserve's Empire State manufacturing survey on Monday, the FOMC minutes on Wednesday, the existing home sales and Philly Fed survey on Thursday. The FOMC minutes could make headlines if reporters find something that might hint at a change in policy or allude to a QE3 program. The Philly Fed will be interesting. Last month the Philly Fed saw a huge plunge from 43.4 to 18.5. This month economists are expecting a decline to 17.5. We'll also start hearing more data about housing and the real estate market over the next two weeks.

I am somewhat concerned that headlines out of the Middle East might negatively impact investor sentiment. On Sunday there were stories of Arab protestors marching on Israel's borders from three different areas at the same time. Coordination through Facebook and online social media allowed Arabs and Palestinians to stage protests on the Syrian border, Lebanon border, and the Gaza border of Israel. Israel is blaming the Syrian government of helping orchestrate these events as an effort to deflect the negative attention from Syria's own brutal crackdown on protestors of the Syrian government. Recently headlines out of the middle east haven't had much impact on the U.S. markets but this time it involves shots fired along the Israeli border so you never know when Wall Street might get nervous.

In summary I am growing more cautious on stocks. The tone of trading seems to have changed even though the larger trend is still higher. The market is lacking leadership and the financial sector continues to be an anchor weighing down the market. Concerns seem to be growing over a slowdown in the U.S. economy even though some of the recent data has been positive. Investors will be watching this week's economic reports for more clues. The end of QE2, just a few weeks away, remains a black cloud over the market. Meanwhile the situation with Greece remains a time bomb. You never know when a headline about Greece can derail the market.

I do think there is an opportunity if we see another pull back in the market. The challenge will be determining if this is just a normal pull back in the course of the longer-term up trend. Or if this is the start of something more ominous.

- James