Are you seasick yet from all of these sharp up and down moves in the stock market? After the best October in 20 years stocks saw a crash early in the week with a -5% plunge in just two days. Yet traders bought the dip midweek and the S&P 500 rebounded +3.1% off its Tuesday lows. This index was up almost +20% from its October lows so we knew stocks were overbought and poised for profit taking but the violence in the move is still a little surprising.

It all started with a terrible hangover in Europe. The week before stocks were surging on positive news that the EU summit may have finally produced a solution for their Greece problem. Suddenly those hopes turned to doubts when the Greek Prime Minister Papandreou called for a referendum (general vote) on the EU bailout he had just agreed to. Europe was suddenly in chaos again and faith in the EU leaders to actually get anything done plunged. Making matters worse for investors and fueling the early week sell-off was the bankruptcy of MF Global a major trading firm.

Economic data was generally disappointing. In the U.S. the ISM manufacturing data was a miss with a drop from 51.6 in September to 50.8 in October. Economists had been expecting a rise to 52.1. Readings over 50.0 indicate growth and expansion. The ISM services index for October came in at 52.9 compared to estimates closer to 54.0. The ADP employment data was slightly better than expected with +110,000 new jobs in October versus estimates for +100,000. Monthly same-store sales data for October was pretty mixed. If there was an overall trend it seemed to be positive sales growth but less than expected. The jobs report on Friday could have been a market mover but it seemed to fizzle somewhat. Nonfarm payrolls came in at +80,000 new jobs for October but economists were expecting +95,000. The good news was a revision of +102,000 new jobs for the prior two months, which more than made up for October's shortfall. I will remind you that we need at least +150,000 new jobs a month to make any dent in the millions of unemployed and underemployed workers.

One of the big events of the week that also seemed to fizzle was the two-day FOMC meeting. Wednesday's announcement was a nonevent. Ben Bernanke and friends left rates unchanged in the 0.00% to 0.25% zone. Bernanke's quarterly press conference failed to stir any major market action. It is worth noting that the FOMC downgraded their 2011 GDP estimates from 2.8% to 1.65% and they downgraded their 2012 growth estimates from 3.5% to 2.7%.

Economic data overseas was also disappointing. China said their PMI survey came in at 50.4 in October, which is a decline from 51.2 in September. Meanwhile in Great Britain their October PMI dropped from 51.1 to 47.4. The only real highlight in Europe was the new ECB President Mario Draghi's decision to cut interest rates by 25 basis points to 1.25%. This was very unexpected and helped fuel market gains on Thursday.

Europe & Greece

The Greek Prime Minister's extremely unexpected call for his country to hold a referendum (public vote) on the EU bailout was a nightmare move for the rest of EU leaders. Depending on your perspective this was the reason stocks sold off. Then again with the market overbought investors were looking for any excuse to take profits. This certainly fit the bill as a reason to hit the sell button.

Papandreou has spent years working with his fellow EU leaders, the ECB and the IMF to "save" his country from a hard default. To work that hard and achieve a bailout two weeks ago only to throw it up to a public vote that hates all the government austerity appeared extremely foolish. I am simplifying the situation but there were immediate calls for a vote of confidence for Papandreou and his controlling party of the Greek government. This vote of confidence caused a lot of handwringing this past week over what happens if he loses the vote of confidence? Who could potentially take his place?

Sadly this soap opera could have a huge impact on the U.S. if Greece does see a hard default. If Greece officially goes bankrupt (technically they already are) then all the credit default swaps kick in, Greek debt plunges in value, and suddenly several major European banks will be insolvent. The debt contagion that EU leaders have been desperately trying to avoid would immediately spread. Most of Europe would fall into recession with several countries bordering on depression level business activity. There would be massive financial failures. The EU is a huge trading partner for the U.S. and the largest trading partner for China. If Europe crumbles it's going to have a big impact on the rest of the world.

EU regulators had hoped to have a solution to their Greece problem prior to the G20 meeting last week. Unfortunately this call for a referendum vote in Greece threw a wrench into their plans. Overall the G20 meeting seemed to be a dud. Germany, France and the U.S. were trying to drum up support for other countries to help contribute more money to the EFSF rescue fund but there weren't any takers (at least no one was interested in committing new capital). The trust factor in Europe has hit new lows. No one wants to be counterparty risk to anyone else.

We might want to look at this from another angle. We've been talking about a Greece default for months. Many believe there is a 100% chance of the country eventually filing bankruptcy and the major players are just stalling for time, trying to prop up their banking system and hoping economic activity will improve prior to the bomb going off. The real elephant in the room is Italy. Investors and analysts have been focused on Italian bond yields all week long. The bad news here is that these bond yields have been hitting new highs. A year ago the yield on a 10-year Italian bond was 4%. This past week it hit 6.39%. Italy's debt is 120% of its GDP and they cannot afford to rollover their debt at 6.3%. When Greece, Ireland and Portugal saw their bond yields hit 7% they had to cave in and ask the IMF for a bailout. Italy cannot ask for a bailout. They are the third largest economy in the EU. There is no one big enough to bail them out. If Italy goes under it's going to take the rest of the continent with it.

Essentially, nothing has been solved. Two weeks ago it seemed that the EU leaders had managed to take the worst case scenario off the table. Suddenly they are staring it in the face with the Greek referendum call. Thankfully at the moment the current Greek government is still in power and they have pulled their plans to hold a referendum. Stay tuned next week for the next exciting chapter in this EU experiment.

Major Indices:

Last week we talked about potential support near 1250 and then near the 1210-1200 area. Last Monday's drop paused near 1250. Tuesday saw a plunge toward 1215 before traders finally started buying the dip. The S&P 500 close at 1253, essentially at the 1250 support/resistance level. If stocks pull back again I would still expect support near 1200. Overhead the index is looking at resistance at 1285 and 1300.

Daily chart of the S&P 500 index:

The NASDAQ Composite pulled back from the 2735 region back to support near 2600in in just two days. At the moment the bounce back has paused under resistance near 2700 and its simple 200-dma. On a positive note the index's simple 50-dma has started to turn higher. If the NASDAQ can breakout past 2740 then we could see it challenge the 2011 highs in the 2850 region.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index experienced a big drop from 760 to 712 early last week. If you look at an intraday chart the short-term trend seems positive with traders buying the dip. Unfortunately the 775 area could be tough resistance since it's converging with the 200-dma. If we see the $RUT hit this area I would expect another pull back. Obviously a breakout past 775 would technically be bullish.

Daily chart of the Russell 2000 index

After a very busy week of economic data this coming week looks pretty barren. We'll see the latest look at consumer credit on Monday. Wholesale inventory data comes out on Wednesday. Import/Export price data for October comes out on Thursday. The first look at Michigan (consumer) Sentiment for November is released on Friday. Plus, there will be a two-day meeting, starting on Monday, for EU finance leaders as they work on the EFSF bailout fund. Then on Thursday the EU will publish their semi-annual economic outlook. Considering all the drama and concerns going forward they might downgrade their growth prospects (similar to what the Federal Reserve just did for the U.S. on Wednesday this past week).

- Thursday, November 10 -
Weekly Initial Jobless Claims
Import/Export price data
U.S. Trade Balance for September

- Friday, November 11 -
Michigan (consumer) Sentiment for November (1st look)

The Week Ahead:

Looking ahead all I see is European headlines. We are still in the tail end of Q3 earnings season and there are a couple of high-profile companies reporting (like CSCO). Odds are the only market moving events will be European. Greece and Italy will continue to dominate the headlines. If it seems like EU leaders can stop the bleeding (again) then stocks are likely to rally. If not, then the markets could be in for another rough week. It seems like the only thing we can count on are more triple-digit days for the Dow Industrial Average. We don't get small moves anymore. It feels like +2% or -2% sessions are becoming normal. That might be great if you're a successful day trader but it can be hell if you're not.

Odds are also really good we're going to hear a lot more about the "super committee" in Washington that is supposed to be finding a way to cut $1.2 trillion in spending cuts. Personally I have very little faith this committee will be able to accomplish this by the November 23rd deadline but I would love to be proven wrong on this one.

Seasonally we are in some of the most bullish months of the year (November and December) but seasonal patterns are not guarantees. European headlines could change the tone of the market in minutes. I am cautiously bullish but would be very careful when it comes to launching new positions. Investors may want to start small and if the trade moves in your favor consider adding to positions.

- James