No is the answer. One of the questions a week ago was, "has a downgrade of the U.S. credit rating already been factored into the market?" Monday saw a horrendous drop across the global markets as investors reacted to news that Standard & Poor's had downgraded the U.S. rating from AAA to AA+. The S&P 500 index plunged from 1200 to 1119 for a -6.7% drop. It was the worst one-day decline since December 2008.

Tuesday saw the drop continue with the S&P500 index falling to 1101.54. I had warned readers a week ago that if the 1150 level fell then we'd see a drop toward the 1100 level. Stocks finally started to see an oversold bounce that quickly accelerated higher after the FOMC announcement. Ben Bernanke and friends promised to keep rates exceptionally low through the middle of 2013. The markets were shocked to hear that time frame and stocks surged. It was a typical short-covering fueled rocket ride higher. After a -6.7% drop on Monday the market saw a +6% rebound off its intraday lows. The S&P500's end of day gain of +4.7% was the best one-day rally in over two years.

Unfortunately the global markets were (are) still hostage to the situation in Europe. After the U.S. credit downgrade a week ago there were new worries on Wednesday that France might lose its AAA rating. French banks were hammered lower and the U.S. markets plunged again. Gold traded over $1,800 an ounce for the first time in history.

Stocks whipsawed higher on Thursday. In the U.S. the weekly initial jobless claims came in under the 400,000 mark for the first time in months. Meanwhile overseas in Europe several countries started a ban on short selling. These tactics rarely work but they can produce a short-term knee-jerk bounce.

Economic data on Friday was mixed. The market could have sold off again on a disastrous consumer sentiment number but it didn't. Stocks managed to rally again producing the first back to back gains for the first time in three weeks. The July retail sales numbers were released Friday morning and came in at +0.5% while June's numbers were revised higher. Yet this was in stark contrast to the University of Michigan preliminary consumer sentiment survey for August, which dropped from 63.7 in July to 54.9 in August - a new 30-year low.

Economists watch the sentiment numbers because it's supposed to help predict consumer spending, which accounts for nearly 70% of the U.S. economy. Yet obviously the relationship isn't work since retail sales are relatively healthy given the slow economic growth while sentiment is crashing.

Overall it was an historic week. The Dow Industrials experienced huge moves of more than 400 points for four days in a row, which is a first! The venerable Dow also rallied more than +860 points off its lows and yet still closed down for the week. It was definitely a volatile week and speaking of volatility the volatility index (VIX) surged to 48.00, its highest level since May 2010.

The VIX has seen six significant spikes in the last 20 years and last week was one of them. Usually, when the VIX is this high it's a huge sign of panic selling (well actually put option buying) and tends to mark a significant market bottom. Historically the VIX does not stay this elevated for very long but there is nothing to prevent it from hovering at above normal levels for a few weeks. The good news is we should closer to a market bottom now than a week ago.

Looking at the S&P500 index we see clear obstacles overhead. There is round number resistance at 1200 and 1250. Using a Fibonacci retracement tool on the three-week sell-off from 1350 down to 1100 there is potential resistance at the 38.2% retracement near 1195, the 50% retracement near 1220-1225 and the 61.8% retracement near 1250ish. On the downside I would look for short-term support near 1150 and 1120 and of course 1100. A few market pundits are suggesting we might see the market retest its lows. If stocks do roll over again I would look for a dip into the 1120-1100 area.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Applying the same tools to the NASDAQ composite we see potential resistance at 2533, 2600 and 2660. I'd focus on the 2600 area as likely resistance. On the downside the 2450 and 2400 levels are probably short-term support. The low last week tested the horizontal trendline evident on the weekly chart.

Weekly chart of the NASDAQ Composite index:

Daily chart of the NASDAQ-100 index:

The small caps tend to be more volatile than the large cap stocks so it's no surprise to see the Russell 2000 index over doing it to the downside. The $RUT actually fell into bear market territory with a -25% drop from its highs. The intraday low was 639 but the $RUT seemed to be trying to hold 650.

The big bounce off its lows left the $RUT hovering near round-number resistance at 700. There is potential resistance at 720 but I'd focus on probably resistance near the 740 area and then the June lows if the $RUT can bounce that high. If stocks roll over then look for potential support in the 660-640 zone.

Daily chart of the Russell 2000

Weekly chart of the Russell 2000

The Dow Transportation index also hit bear market territory with its drop this past week. The bounce has reduced that correction to -17.5%. I suspect the 4900 area could prove to be tough resistance. Plus the 200-dma overhead is additional resistance.

Weekly chart of the Transportation index:

We have a busy week of economic data. The market will have plenty of headlines it can trade around. The big events are probably the NY Empire survey on Monday, the PPI on Wednesday, and the CPI and Philly Fed on Thursday. The unusual event for the week is a meeting between France's Sarkosy and Germany's Merkel as the two biggest EU members try to work on saving the union from the periphery's debt burden.

- Monday, August 15 -
New York Empire Manufacturing

- Tuesday, August 16 -
Housing Starts for July
Building Permits for July
Meeting between Merkel and Sarkosy

- Wednesday, August 17 -
Import/Export prices
Industrial Production
Capacity Utilization
Producer Price Index (PPI) for July

- Thursday, August 18 -
Weekly Initial Jobless Claims
Consumer Price Index (CPI) for July
Existing Home Sales
Philly-Fed for August

Looking ahead we could see the market churn higher in a two steps forward, one step backward type of action for the next couple of weeks. Even though we've seen a big bounce from the intraday lows the market is still oversold. I suspect the path of least resistance is probably higher, at least short-term. Unfortunately all the broken levels of support are now new levels of resistance. This week's economic news could be used as a spark to move the market either direction. While the volatility has contracted it remains elevated and we could see still some big movement.

As I mentioned earlier there are those who believe the market will retest its lows before finally forming a bottom. Retesting a low is more art than science. It could be a new higher low or a new lower low before stocks see a significant rebound again. The problem with a lower low is that it fuels new fears that the low may not be in yet but as long as it's relatively close to last week's low it could work.

The wild card remains Europe. If Europe can't get its act together then who knows where we'll be by the end of August. One thing is certain. The reaction to the U.S. credit downgrade and the announcement from the FOMC has pushed the bond market to new relative highs. As bonds rally the yields drop. The yield on the 10-year bond has plunged from 3.0% to 2.2% in days. The low this past week was 2.09%. These are massive moves for the bond market. While U.S. bonds may be considered "safe" they're not going to generate any returns at these levels. Money managers will feel a great temptation to put money to work in the equity markets generate any significant returns for the year. As long as the economic data does not support a double-dip recession scenario then the bottom might be in for the stock market.

I realize you don't want to hear "might" or "could" when we're talking market direction but there is still a lot of uncertainty regarding the U.S. and global economies, and the EU's attempts to stave off a debt contagion. Traditionally August and September are bearish months for the U.S. market so the calendar is against us at the moment. On the positive side the huge spike in the VIX this past week is definitely a signal that stocks may have bottom, at least short-term.

Aggressive trades will want to consider taking advantage of the sell-off and putting money to work. My suggestion is to keep your position size very small to limit your risk. Cautious traders may want to wait and see if the market does retest the lows over the next week or two and then consider whether or not you want to buy the dip or wait for the bounce.

- James