Another one bites the dust. The S&P 500 index managed to push its way past another significant resistance level, this time at the 1150 mark. One thing that is proven time and time again is if you think the stock market is overbought or oversold it can always get more overbought or oversold. Stocks remain overbought with big gains off their late August lows but optimistic bulls could argue we have room to run after a two-week consolidation sideways under the 1150 level. The question now is how will fund managers, facing yearend on October 31st, react to Q3 earnings news? Will they buy the news or sell the news? Window dressing kept stocks near their highs for the quarter end in September. Now funds are facing their yearend in just three weeks.

The market's resilience on Friday was pretty amazing. The jobs number was another huge disappointment. Economists were expecting jobs growth to come in near zero to potentially a small gain. Instead the Labor Department said the country lost jobs (-96,000) for the fourth monthly decline in a row. Private companies hired +64K people but layoffs at federal and state governments were higher than expected. The Labor Department also revised July and August numbers lower. It was not a bullish report so why did stocks rally?

Stocks pushed higher on Friday in spite of the bearish jobs report because the lack of job growth virtually guarantees that the Federal Reserve will launch a new quantitative easing program (QE for short) before yearend. At least that is the train of thought and investors focused on this silver lining in the dark cloud of job losses. We've been expecting a new QE program from the Fed for weeks now so it's already been priced into the market at this point. Yet some fed heads are suggesting that a new QE program is not a done deal. Even if the FOMC does announce a new QE program stocks could sell off anyway if the program isn't big enough. Estimates range from $100 billion to $1.5 trillion (with a T) but most are estimating the Fed will launch a new QE program in the $500 billion to $1 trillion range. The market will be keenly focused on tomorrow's release of the fed minutes from the latest meeting (September 21st) in hopes of gleaning some info on their plans for monetary policy. If the Fed does not launch a new QE program at their November meeting stocks should react negatively!

All of this expectation for a new QE program from the Federal Reserve has been pushing the U.S. dollar lower for several weeks now. The dollar slipped to new multi-month lows last week but appears to be trying an oversold bounce in the last few days. The dollar's decline has been pushing commodities higher so when it does bounce it could spark some sharp profit taking in commodities. Gold prices rallied to a new all-time high of $1,354 an ounce on Monday. Silver hit a new 30-year high at $23.675 intraday. Copper prices hit a new 27-month high. Oil has been surging higher for weeks but actually reversed today on hints the dollar might bounce. Meanwhile the bond market continues to rally as investors distrustful of the stock market's rally seek safety. Bond yields move opposite of prices so when prices hit new relative highs today the yields hit new relative lows.

Daily chart of the U.S. dollar ETF (UUP):

Weekly chart of the U.S. dollar ETF (UUP):

Daily chart of the GLD gold ETF:

Looking ahead Tuesday's focus will be on the Fed minutes and as long as there are no surprises then traders will focus on third-quarter earnings. Intel (INTC) will be the main earnings headline on Tuesday. Last week's earnings guidance from KLIC does not bode well for semiconductors but INTC is the 800 lb. gorilla in the industry. J.P. Morgan Chase (JPM) will report earnings on Wednesday and offer some insight into the banking sector. Google (GOOG) reports earnings on Thursday. Shares of GOOG have seen a $90 rally from their late August lows. If GOOG disappoints I would expect a correction toward the $505-500 zone. General Electric will be the main earnings headline on Friday. In addition to earnings we'll get the weekly initial jobless claims, the trade balance numbers, and the PPI report on Thursday. The CPI, retail sales figures, Michigan Sentiment reading, and the New York Empire State manufacturing survey comes out on Friday the 15th. I am tempted to say that we're facing a lot of landmines that could send stocks lower but after the reaction to the jobs data on Friday I'm not sure how much bad news it will take to actually spark some selling.

Short-term the trend is up. I'm looking for the S&P 500 to rally toward the May 13th highs near 1173. If we do see some profit taking then broken resistance at 1150, 1130, 1120 and 1100 can all act as support. Bigger picture the inverse head-and-shoulders pattern on the S&P 500 is forecasting a move to 1240 but I suspect the 2010 highs near 1220 could be tough to break.

Daily chart of the S&P 500 index:

The NASDAQ composite is still trying to breakout past resistance near the 2400 level. After a rally from the August lows near 2100 this index is very overbought. Overhead we can expect some resistance about every 25 to 50 points (2425, 2450, etc). On a pullback look for the NASDAQ composite to find support near 2300 and its simple 200-dma.

Daily chart of the NASDAQ index:

The small cap Russell 2000 index continues to power higher, which is a bullish signal for the market. Unfortunately, it's growing very overbought. Eventually this group will correct and the small caps tend to be volatile. On a more positive note the bullish "January effect" in small caps has been happening earlier and earlier each year and moved into the fourth quarter so the general trend for small caps should be higher for the next few months. I suggest readers stay patient and wait for the eventual correction. Broken resistance near 670 should be new support but it wouldn't surprise me to see a pullback all the way to 650.

Daily chart of the Russell 2000 index:

At this point I feel compelled to repeat some of my comments from last week. Analysts and investors expect Q3 earnings to be weak so even if corporate results are bad there is a chance stocks could rally on the "it could have been worse" attitude. At the same time stocks are very overbought, which might suggest traders will be quick to lock in gains and sell stocks on negative results. The real focus will probably be on forward looking guidance and not so much on how companies performed in the last quarter. Investors want to be assured that we're not facing a double-dip recession in 2011. Mutual funds are also looking for clarity. Stock funds have seen a lot of outflows over the past several months. Money managers have to make some decisions before their fiscal yearend in just a three weeks. As long as the S&P 500 holds above resistance at the 1150 level funds might feel like they have to be long the market.

I am still expecting a correction sometime before October ends. That may be wishful thinking on my part but odds favor a pull back, especially about the middle of earnings season once all the high-profile, big cap names have reported. Wait for the market to provide our next entry point. Don't rush into a position. It could take a couple of weeks of profit taking before it's time for us to launch new bullish trades.

- James