Stocks delivered a strong oversold bounce on Friday. Shorts were ready for a drop to new monthly lows following the Q2 GDP revisions and Bernanke's speech on Friday. Yet both events failed to spark new selling and bears began to cover ahead of the weekend, fueling the widespread market bounce. Intel's revenue warning and the consumer confidence numbers were lost in the shuffle. The bullish reversal in stocks was matched by a bearish reversal in bonds with yields on U.S. treasuries surging from their intraday lows.

The big event on Friday was the Q2 GDP estimate revisions. After the shockingly poor trade numbers a couple of weeks ago and the ongoing parade of disappointing economic data there were whisper numbers that Q2 growth would be downgraded to just +1.0% from +2.4%. Instead the Commerce Department said Q2 growth was +1.6% and the markets breathed a sigh of relief it wasn't worse. It is still a significant drop from Q1's +3.7% growth and some economists are worried Q3's growth could be worse in the +1.0-0.0% range.

Investors were also eager to hear from Federal Reserve chief Ben Bernanke who was speaking at a conference in Jackson Hole, Wyoming on Friday. Bernanke assured his listeners that the economy was still improving and we are poised for a 2011 comeback. Of course that's a change from expectations a few months ago when it was a second half 2010 comeback. On a side note, readers of this column know that we have been worried about a double-dip recession hitting in the second half of 2010 or 2011. I'd like to think Bernanke is right but I don't have a lot of hope in his projections. Of course he is going to preach hope and growth. Anything else (negative) would become a self-fulfilling prophesy with consumers already scared and businesses already holding back in fear of another recession. Bernanke essentially said the economy would improve and should any unforeseen events occur the Fed is ready and willing to save us. For those expecting Ben to outline specific forms of stimulus or quantitative easing it was a disappointing speech.

Friday's session also saw the release of the final revision for August consumer confidence numbers. This came in at 68.9, down from the initial release of 69.6. No one was expecting any fireworks from this report. I'm more curious how the next couple of consumer sentiment reports change in September and October. How has the uptick in weekly jobless claims affected sentiment and what will the next jobs report show?

Speaking of jobs, last Thursday's initial jobless claims came in at 473,000. That's better than the 485,000 analysts were expecting and down from the 500,000 two weeks ago. Unfortunately the trend in the weekly jobless claims has been rising and it doesn't bode well for the non-farm payroll report due out on Friday, Sept. 3rd. Currently consensus estimates expect the country to lose -118,000 jobs in August but we do not know how many of these will be the final batch of laid off census workers from summer. The figure economists will be watching is private employment, which is expected to come in at +41,000, down from July's +71,000.

Next week has a lot of economic data coming out. I'm not going to list all of them but here are a few of the highlights. On Tuesday we'll see the ISM for New York, ISM Chicago, consumer confidence (not sentiment), the Case-Shiller home price report, and the FOMC minutes from the last meeting. Wednesday will bring the ADP employment report for August. Thursday should see the Kansas Fed manufacturing survey, retail chain store sales figures, pending home sales, factory orders, and of course the weekly initial jobless claims. All of this will lead up to Friday's jobs report. The jobs report is the wildcard. If estimates start to suddenly move higher and the number disappoints then stocks should sell off. Yet if Wall Street estimates make a sudden move lower and the number is better than expected then stocks might bounce. I would ignore the headline number and focus on the private sector growth figures on Friday.

Corporate news was mixed last week. Merger and acquisition news is normally bullish for the market. It is a sign that businesses are feeling confident and willing to spend money to make acquisitions instead of hoarding it for fear of a downturn. M&A is picking up. Last week merger news was dominated by the bidding war over 3PAR, a cloud-computing data storage company. Both DELL and Hewlett-Packard (HPQ) are fighting over the company. As of Saturday afternoon it looks like HPQ might have edged out DELL with a $2 billion ($30/share) bid for 3PAR. Just three weeks ago 3PAR was trading under $10 and had been stuck in the $9-11 range for six months.

Intel had much more significant news with a revenue warning on Friday morning. The company said Q3 revenues could come in $1 billion less than previously estimated. Yes, that's a billion, but keep in mind the company just had a record-setting Q2 with almost $11 billion in revenues. So a little pull back in this economic environment isn't too surprising, especially with the PC market stalling. What is surprising is that Intel had just raised revenue and margin guidance six weeks ago when it reported earnings in July. Unfortunately Intel's warning could be a sign of things to come as more and more corporations warn about their third quarter results. Shares of Intel spiked down under $18.00 intraday but rebounded to close up +1.0%. The stock came very close to testing the top of the gap ($17.72) from July 2009, which would have been technical support. If Intel breaks this level we can expect it to fill the gap and trade near $16.90.

Technically the market is flashing mixed signals. The trend is down but we're a little bit oversold. Some of the major indices produced a short-term bullish double-bottom pattern last week, which is positive but it needs to see follow through. The S&P 500 index dipped to the 1040 level, which was very obvious support so traders were naturally ready to cover shorts on a bounce. If stocks do continue to bounce I would look for the S&P 500 to rally towards resistance near 1080 or the 1100 level. Below I've posted an hourly, daily and weekly chart of the S&P 500.

Hourly chart of the S&P 500 index:

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ Composite has performed a similar bullish double bottom at the 2100 level. Unfortunately that involved breaking down under its May and early June lows. The relative weakness here is a warning even if we can lay the blame at the semiconductor sector. If the NASDAQ can rebound from here I would look for overhead resistance near 2200 and its 50-dma.

Daily chart of the NASDAQ index:

Daily chart of the SOX semiconductor index:

The small caps have been showing relative weakness. The Russell 2000 index dropped all the way down toward its July lows. While the relative weakness is bad it also presents an opportunity. The $RUT has the opportunity to build on a much more significant double-bottom. Nimble and more aggressive traders might want to consider short-term bullish positions here with an appropriate stop loss. Watch out for potential resistance at its 50-dma and the 200-dma. It is worth noting that the 50-dma crossing under the 200-dma (which happened about three weeks ago) is long-term bearish and this might turn out to be nothing more than an oversold bounce.

Daily chart of the Russell 2000 index:

In summary it looks like the oversold bounce in stocks is poised to continue. Maybe see a nice pop on Monday and then slowly drift higher into Friday's jobs report. Then we'll move on the jobs data. The rally could end there or it might propel the S&P 500 toward the 1100 level. I still think odds are high that we'll see stocks rollover again and we could see the S&P 500 test the July lows before the end of September. However, a surprise in the jobs report that is stronger than expected could change this outlook.

Short-term traders can trade the technical levels of support and resistance. As longer-term investors we need to be patient and pick our entry points. Why buy stocks with the S&P 500 at 1065 when we might get a chance to buy them at 1010? Keep in mind that the midterm election rhetoric will really start to heat up in September and will get even hotter in October. All of the negative ads and mudslinging will be bearish on consumer and investor sentiment. Yet any sell-off this fall probably sets us up for a Q4 rally higher.

~ James Brown