It was a very busy week for the stock market and bulls were in charge. Stocks managed to rally in spite of several negative headlines, including a major downgrade for Spain, disappointing U.S. Q1 GDP growth, and rising jobless claims. Fueling the market's move higher was a string of high-profile earnings beats and a positive interpretation of the FOMC's latest comments. Two weeks ago big cap tech stocks were leading the market lower. This past week that trend reversed and the same stocks powered the market higher. A huge pop higher in shares of AAPL almost overshadowed the FOMC announcement on Wednesday. Gains in GOOG, PCLN and similar stocks helped push the NASDAQ to a +2.2% weekly gain.

We are in the middle of Q1 earnings season. A week ago 82% of the S&P 500 companies that reported had beaten Wall Street's estimates. That number has dropped to 65%. The norm is for 62% of S&P 500 companies beat estimates. A major driver behind the market's gains is earnings growth. Prior to this earnings season analysts were expecting average earnings growth of -0.9%. Thus far the actual number has risen to +6.9%. We're seeing a lot of positive surprises because Wall Street had lowered the bar too much. Can this continue? Normally the second half of earnings sees a drop in the quality of earnings reports. Traders probably should not count on earnings news to keep the rally alive.

Overall economic data in the U.S. was mixed. Most of the housing data was positive with a monthly increase in the Case-Shiller home price index, snapping a nine-month decline. New home sales came in better than expecting rising to an annual pace of 328,000. Pending home sales for March surged +4.1% compared to estimates for +1% growth. The final revision to the University of Michigan consumer sentiment survey inched higher to 76.4, pushing the streak to eight months of gains.

The durable goods orders for March were a disappointment but the real surprise was the Q1 GDP number. Economists had been expecting the U.S. to grow about +2.3% with some analysts raising their estimates to +2.5%, which is a drop from Q4's +2.9%. Unfortunately the first Q1 GDP estimate came in at +2.2%. Surprisingly this lowered than expected growth number failed to stop the market's rally.

Adding to the positive mood for the market was the FOMC meeting and Ben Bernanke's comments at his press conference. As expected the Federal Reserve kept rates unchanged in the 0.0% to 0.25% range. The Fed also updated their growth forecasts and raised their 2012 estimates from the +2.2%-2.7% range to +2.4%-2.9% range. Chairman Bernanke reiterated prior comments that the FOMC is ready to take action (i.e. offer some form of QE) if conditions warrant it. Overall the Fed reaffirmed the expectation that rates will remain low through 2014.

Front and center on the Fed's collective mind is the U.S. labor market. Unfortunately the weekly initial jobless claims continue to rise. Last week claims came in at 388,000, up from 386K the week before. That's three weeks in a row claims were above 380K and the four-week moving average hit its highest level since early 2012. This doesn't bode well for the monthly nonfarm payroll report due out next Friday.

Many of the headlines last week came from Europe but we'll touch on Asia for a moment. The latest China HSBC flash PMI index came in at 49.1, which is up from 48.3 but these numbers need to be above 50 to indicate growth. Meanwhile the Bank of Japan just announced more quantitative easing for the second time in three months. Japan is trying to fuel growth and they just upped their QE asset-buying program from 30 trillion yen to 40 trillion (about $494 billion).

Now let's look at Europe. There seemed to be a lot of mixed signals between confidence surveys and growth. The United Kingdom's consumer confidence hit 10-month highs yet the U.K. economy has fallen into a double-dip recession. French consumer confidence hit 18-month highs yet French consumer spending fell more than expected in March. Germany, the largest economic powerhouse in the EU, saw its consumer confidence fall to a five-month low. Last week did see improvement with successful bond auctions in both Italy and Spain but that could change following the downgrade by Standard & Poor's.

S&P cut Spain's credit rating by two notches to BBB+. The agency is worried that the Spanish banking system will need additional support and unemployment continues to climb. This past week Spain said official unemployment hit 24.4%. Compare that to the unemployment in the U.S. during the Great Depression back in the 1930s which only hit 22%.

In Spain, unemployment for adults under 25 years old is over 50%. The Spanish real estate market has crumbled. Citizens are turning to the black market to avoid paying taxes. Their economy is in recession. Thus far the country has been successful with its debt auctions this year but now that S&P has downgraded the country it's going to put more pressure on Spanish debt and push yields higher. Ratings agencies Fitch and Moodys still have Spain rated an "A". They could follow up with downgrades of their own in the coming weeks. Believe it or not but the Spanish equities markets actually rallied in the face of this downgrade.

Both Spain and Italy have been labeled as too big to bailout but odds are we are going to see more and more talk about a bailout for Spain this year. Technically you could argue the EBC's LTRO easy money program was a backdoor bailout for EU banks to buy Spanish debt but the impact seems to have worn off. You can bet that Spain's situation will continue to make headlines the rest of the year.

Major Indices:

A week ago we were worried that the S&P 500 index was going to breakdown from a bear-flag pattern and signal a new leg lower. Sure enough the index did breakdown on Monday but there was no follow through. Stocks reversed off their Monday lows and the index has been up every day since. Now the S&P 500 is back above technical resistance at all of its key moving averages and the 1400 level. The S&P 500 is up +1.8% for the week and up +11.6% year to date.

Is the correction over? Or is this just another head fake? If the S&P 500 fails to breakout past its 2012 highs in the 1420 area there will be immediately worries about a bearish double top pattern forming. I do think the index will rise toward 1420 where it goes from there is anyone's guess. Earnings season will be slowing down and earnings quality will decay. U.S. economic data seems to be slowing down as well. Parts of Europe are in recession already. China is trying to avoid slowing down too much. There are plenty of hurdles for the bulls to overcome to keep this rally alive.

On a short-term basis the 1390 and 1360 levels are support. If somehow the S&P 500 gets past 1420 then the next resistance is probably 1440.

Daily chart of the S&P 500 index:

60-minute chart of the S&P 500 index:

A bullish reversal in big cap technology stocks helped produce a similar move in the NASDAQ. The index gapped down to new relative lows on Monday only to gap higher again on Wednesday thanks to a big pop in shares of AAPL. Now the NASDAQ is back above resistance near 3060 and looks headed for its 2012 highs.

On the weekly chart (not shown) last week's performance has created a bullish engulfing candlestick reversal pattern. On a short-term basis I would look for resistance near 3130. If stocks pullback then look for support near 3000.

Daily chart of the NASDAQ Composite index:

60-minute chart of the NASDAQ Composite index:

The small cap Russell 2000 index produced a similar bear trap pattern with the breakdown from its bear-flag consolidation and then the reversal higher off its Monday morning lows. Now the $RUT is back above resistance, pushing through a cloud of moving averages in the 810-820 area. The next challenge for the bulls is getting past the 2012 highs.

Daily chart of the Russell 2000 index

60-minute chart of the Russell 2000 index

I am not posting a chart of the transportation index tonight. It continues to churn sideways inside a neutral pattern of lower highs and higher lows. We should see this sector breakout one way or the other in the next couple of weeks. I would expect the catalyst to be a major economic report or a move in oil prices.

Below is a 90-minute chart of Apple Inc. (AAPL). When it was correcting lower AAPL was pulling the NASDAQ-100 and NASDAQ composite with it. Then the company blew away Wall Street's earnings estimates by a huge margin. The stock gapped open higher on Wednesday, lifting the NASDAQ indices higher with it. The question now is where does it go from here?

Plenty of analysts will argue that AAPL remains cheap on a valuation basis. Plus, they are growing like crazy in Asia and still have a long way to go to saturate its current markets. At the same time all of this news is already known. The earnings news is out. What's left to drive AAPL higher? Do shares slowly consolidate gains and melt lower? Or do investors looking for earnings growth continue to drive this stock, with the biggest market cap in the world, even higher? If I had to guess I would bet on a choppy sideways consolidation but don't quote me on that.

chart of the Apple Inc. (AAPL)

One more chart I want to mention is the GLD gold ETF. Gold could be near the bottom of its right shoulder on the inverse head-and-shoulders pattern. This past week produced a bullish engulfing candlestick reversal pattern. On the daily chart (not shown) the GLD bounced from technical support at its rising 300-dma. The precious metal certainly looks poised to move higher but this has been a widely telegraphed move and anyone who cares already knows about it. We already have the GLD on our watch list if price moves higher. Either way gold and the GLD could see some big moves over the next several weeks.

chart of the GLD gold ETF

Looking ahead we have another busy week ahead of us. Q1 earnings season is still in full swing. Plus we have all the normal first of the month economic reports. The ISM indices will give us a glimpse at the U.S. economic picture. Yet the focus this week will be jobs. The ADP employment report comes out on Wednesday. The big event will be the nonfarm payroll report on Friday. Economists are estimating the U.S. added 170,000 new jobs in April. Last month we only added +120K, which was a huge miss and down significantly from +246K the prior month. The market will definitely move on this report but direction will depend on the spin. If the jobs number is too low, stocks could see a kneejerk reaction lower and then reverse because a weak jobs number means the Fed is closer to adding QE3. If the jobs number is too high then stocks initially rally but that means the Fed is farther away from adding any more stimulus to a slow, unhealthy economy. Either way next Friday could be a volatile session.

Economic and Event Calendar

- Monday, April 30 -
Personal Income and Spending
Chicago PMI

- Tuesday, May 1 -
automobile sales
ISM (manufacturing) Index for April
construction spending

- Wednesday, May 2 -
ADP Employment report

- Thursday, May 3 -
Weekly Initial Jobless Claims
ISM services index

- Friday, May 4 -
nonfarm Payrolls report for April
Unemployment rate

Upcoming events:

May 6th - Greece national elections
May 6th, - 2nd round of French elections

The Week Ahead:

A week from now the focus will be on the French presidential election. The second round of elections is scheduled for May 6th. At the moment French unemployment is nearing 10% and the country's AAA credit rating is at risk. Some are predicting France could get downgraded to an A- rating. That would really shake the EU. However, the real news will be who wins the election? Right now the incumbent Sarkozy is likely to lose. His rival, Hollande, is a socialist. If Hollande wins then the cooperation between France and Germany, which has been crucial to saving the Eurozone thus far, could be in jeopardy. With Spain and Italy inching closer and closer to the cliff's edge, not having a united France and Germany could spell trouble.

Another key election next weekend is the Greek national elections, also scheduled for May 6th. While it's not expected to be a market mover you never know what could act as a catalyst for stocks. If the new Greek government starts talking about leaving the euro and not honoring its prior obligations it might cause problems for the markets.

We are also approaching the seasonal "sell in May" phenomenon. You've probably heard it before. Historically if you were only invested from November through April your market returns are astronomically better than if you were invested May through October. This seasonality has been widely publicized for years and years and there is a segment of the investor population that actually follows it. If you're sitting on significant Q1 gains I could definitely see the temptation to cash out and wait for fall, especially with a rising wall of worry for the market to climb.

As of this moment the short-term trend for stocks is up. However, I am going to remain cautious until we see the indices convincingly breakout past their 2012 highs. Otherwise there is too much risk that the market does see a bearish double top and we sink (or churn sideways) into the May-June time frame. I do believe there is always an opportunity somewhere but sometimes the market environment is more "friendly" than others.

- James