The stock market managed to extend the rally another week in spite of mixed economic news. Lack of profit taking on the big gains from the prior week was seen as a bullish signal. The U.S. dollar posted a gain for the week but gains appeared to stall. Both the dollar and the euro have been trading sideways in a multi-week consolidation pattern of lower highs and higher lows. We should see these currencies breakout one way or the other soon. Meanwhile gold and silver saw a four-day rally. Year to date the S&P 500 is up +6.5%, the NASDAQ composite is up +6.1% and the small cap Russell 2000 index is up +7.2%.

I am going to briefly touch on some of the economic headlines from last week. Here in the U.S. the Commerce Department said durable goods orders were up +2.1%. The June ISM services survey came in at 53.3, which was slightly under expectations but still in growth territory above 50.0. The weekly initial jobless claims came in at 418,000 but this was down from 432,000 the prior week. The ADP employment report was much, much better than expected at +157,000 new private sector jobs. Economists were only expecting +60,000. This fueled enthusiasm for a positive jobs report on Friday morning.

Overseas the latest PMI survey for China came in at 54.1, which is still in positive territory. China also raised interest rates by 25 basis points in a widely expected move. Moody's rating service said they were reviewing some Chinese banks for understated loans to local governments. Meanwhile in Europe Moody's sparked some concern when they downgraded Portugal's debt to junk status. This renewed fears that the EU has more problems than just Greece. The ECB raised interest rates by 25 basis points to 1.50%. Its counterpart, the Bank of England, left rates unchanged at 0.5% and said they would leave their 200 billion pound quantitative easing program unchanged. In other news Barclays raised their 2012 estimates on oil prices by $10 to an average of $115 a barrel.

The biggest economic report of the week was the Friday morning non-farm payroll report. Estimates for this report were all over the map but on average the estimates were for growth of about +80,000 to +100,000 jobs. The Department of Labor reported that June only saw +18,000 jobs and the unemployment rate ticked up from 9.1% to 9.2%. Furthermore the gain in May was revised lower from +54K to +25K and April was revised down from +232K to +217K. The revisions were -44,000 jobs and June only saw a gain of +18,000 so we actually lost ground. Simply put the June jobs report was a disaster. This would have been the perfect excuse to sell stocks and lock in gains after such a big bounce from the late June lows. Yet profit taking was rather mild and the markets actually rebounded off their lows of the session on Friday.

Looking at the stock market's major indices there is still a chance they are forming a bearish head-and-shoulders pattern. Yet the rally this past week is making that less likely, especially for the NASDAQ and the Russell 2000. The S&P 500 had stalled at resistance near 1340 for a couple of days but the ADP data on Thursday pushed the index to a new five-week high. We were less than ten points away from the S&P 500's 2011 high. Then the jobs report hit. Traders started the buying the dip by lunchtime on Friday.

At the moment the S&P 500 remains short-term overbought and due for some profit taking but it may not happen. If this week's earnings results come in better than expected then we might see stocks challenge their 52-week highs or even breakout. If instead a normal pull back occurs then I would look for the S&P 500 to find support near 1320 and then at the 1300 level.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The rally in technology stocks this past week helped fuel big gains for the NASDAQ composite. It soared past potential resistance in the 2840-2850 area. The NASDAQ probably would have hit new multi-year highs had it not been for the jobs disaster on Friday morning. Even then the NASDAQ saw a strong bounce off its intraday lows. Unfortunately while the rally's strength is encouraging the NASDAQ also remains very, very short-term overbought. It would be tough to chase it at these levels. The 2800 level is probably the first area of support on a pull back.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index also saw an extension of the prior week's rally. The $RUT made a run at its 2011 highs and stalled at 860 on Thursday. Profit taking on Friday was minor with a -0.6% loss. Just like the NASDAQ the strength of this rally is amazing but the $RUT is extremely short-term overbought and due for some profit taking. If not here at its highs then where would you expect profit taking to take place? Don't get me wrong. The market can stay irrational a lot longer than anyone expects. I'm just concerned who is going to keep the buying pressure up to lift stocks past their highs without some sort of consolidation first?

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

We continue to watch the SOX semiconductor index. What is important is that the NASDAQ managed to rally without the semis. The SOX has been stuck under resistance near 420 and its 50-dma. Plus, the SOX has yet to break the trendline of lower highs.

Weekly chart of the SOX semiconductor index:

Even though oil was rising the first part of the week the Dow Jones transportation index still managed to rally to all-time record highs by Thursday. The long-term trend is up but the group, like so many others, is short-term overbought here.

Weekly chart of the Transportation index:

Looking ahead we have a busy week of economic data. The FOMC minutes on Wednesday the 13th would normally be a headline event but now that Bernanke is doing press conferences this may not hold much heft any more. The PPI and CPI will be significant reports. Plus the Empire state manufacturing index and the Michigan Sentiment numbers will make headlines. Yet dwarfing everything will be Ben Bernanke's semiannual testimony before Congress and the onset of Q2 earnings season. Bernanke speaks before Congress on Wednesday and the Senate on Thursday. Earnings begin on Monday with Alcoa (AA) reporting after the closing bell.

- Wednesday, July 13 -
Import/export prices
FOMC minutes
Bernanke's testimony before Congress

- Thursday, July 14 -
weekly initial jobless claims
PPI for June
Retail sales for June
Bernanke's testimony before the Senate

- Friday, July 15 -
CPI for June
NY Empire State manufacturing survey
Michigan Sentiment for July

Looking ahead we will hopefully hear a lot less out of Europe - at least for another week. The Greece problem should be on the backburner and recent headlines about Portugal's debt or Italian banks don't seem to have much impact on U.S. stocks. On Sunday, July 10, President Obama is supposed to be meeting with congressional leaders to hammer out some sort of compromise on the debt ceiling problem. If they announce an agreement on Monday morning it could fuel further gains for the market. Otherwise this issue will remain a black cloud on the not too distant horizon. We want to see an agreement by July 22nd to avoid a default in early August.

The real focus this week will be Q2 earnings. Investors have been agonizing over the recent economic soft patch but most of the economic data, minus the labor market, has been showing a significant improvement. Previously earnings expectations were for a soft second quarter. Are investors still expecting disappointing earnings numbers or has the recent rash of better than expected economic data lifted expectations for corporate results? Here's another way to look at this question. Do investors buy the earnings news because they could have been worse? Or do investors sell the news because results should have been better? Right now the Federal Reserve is forecasting significant improvement in the second half of 2011. Will corporate guidance reaffirm this view or will it throw more doubt on the recovery and fuel fears of a double-dip recession?

Earnings season officially kicks off on Monday but the real flood of earnings doesn't hit for another week. In addition to Alcoa's (AA) report traders will be looking for results from FAST on Tuesday, from YUM and MAR on Wednesday, from JPM and GOOG on Thursday, and Citigroup (C) on Friday.

As LEAPS traders not much has changed for us since last week. The market remains short-term overbought. Odds are we could see individual stocks sell-off sharply as investors react to earnings news. The volatility could be a matter of fast money rotating out of companies that report and into new stocks prior to announcements hoping for a pop higher.

More importantly the market's resilience this past week was impressive. I remain bullish but we want to stay cautious in our approach to new positions. I am suggesting investors trade small to limit risk. In addition to buying dips near support I am also starting to see a lot more potential for breakout buy signals.

I am not dismissing my cautious comments from a week ago. These next two weeks could be pivotal. Will the market breakout past its 2011 highs or will it reverse lower? In the meantime we still want to be careful about not buying stocks that are too over extended. Fortunately the tone of the market has changed significantly in the past two weeks. Let's hope bulls can whistle while they work.

- James