After last week investors should be encouraged. The Federal Reserve did not disappoint. Ben Bernanke and his team announced a $600 billion quantitative easing plan plus another $300 billion as they reinvest their mortgage-based security asset sales. More importantly the market did not sell the news. After the big gains off the late August lows, with much of it driven by QE expectations, I thought for sure the announcement was already baked into the market. However, traders are interpreting the Fed's move as a "put" under the market. Essentially the Fed isn't going to let the market see any significant declines. At least that's belief. You can argue with it all you want but stocks are going higher with this mentality.

On top of the Fed news we're starting to see an improvement in the economic data. Spending is improving. ISM manufacturing and services is improving. The biggest surprise was the jobs number on Friday. Economists were only expecting +60,000 jobs and the Labor Department said the U.S. added +151,000 jobs in October. Actually the private sector added +159,000 but there were some declines in government hiring. That's the biggest report in several months. The August job losses were revised from -57K to -1K and September was revised from -95K to -41K. Adding to the rosy picture was an increase in hours worked, which normally precedes any increase in hiring.

The combination of strong Q3 earnings results, improving economics, a very supportive Fed, and a weaker dollar has created a very bullish environment for stocks. We have had a bullish market bias for the fourth quarter but our challenge today is our next entry point. The S&P 500 is up +17 from its August lows. The NASDAQ and Russell 2000 index are up even more. It's tough to chase new highs because you don't want to be the sucker who bought the top. At the same time you don't want the market to run away without you. Every day investors are facing both of these fears and so far traders have been more worried about the market getting away from them. Common sense tells you this up trend isn't going to last for much longer but then again the market plays by its own rules. Even if stocks do see a correction I don't think it will be very deep. There are too many people looking for dips to jump on board.

Currently the S&P 500 has rallied past resistance near 1200 and its 2010 highs near the 1220 area. The close at new 52-week highs is very bullish but stocks are still very overbought. The best case scenario here is a sideways consolidation. Maybe the market can churn sideways for a little while, burn off some of this overheated steam, and then make another run into yearend. On a short-term basis I would watch the 1200 level to be support for the S&P 500. On a bigger pull back the 1160 level is probably a good area to watch. I want to remind readers that the inverse head-and-shoulders pattern formed in the S&P over the summer is forecasting a bullish target of 1240. The 1240 level could be our next overhead resistance.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ Composite has delivered an incredible run with a +22% gain in the last ten weeks. This tech-heavy index has broken out past its 2010 highs and closed at new two-year highs this past week. On a short-term basis look for the NASDAQ to fill the gap from Thursday morning. You'll also notice that the 10-dma has been short-term support. I hate to buy this chart because it's so overbought but I wouldn't short it either. As much as I would like to see a correction toward 2400 I don't think it will happen, at least not this year. A normal 5% pull back would suggest a drop to 2450 but I doubt the index will get that low before traders buy the dip.

Daily chart of the NASDAQ index:

Weekly chart of the NASDAQ index:

We also want to keep an eye on the small cap Russell 2000 index. After a three-week consolidation near the 700-710 zone the small caps are in breakout mode again. The $RUT is nearing potential resistance at its 2010 highs around 742 and I expect the index to get there pretty quick. This level would be a logical spot to look for some resistance but lately the market has been plowing right past traditional resistance levels. A dip back toward the 713-710 zone would certainly look like a new bullish entry point.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

In summary, we want to wait for a dip but dips are likely to be shallow with everyone looking for the same entry point. This is a good time to practice strong money management. With stocks this overbought you may not want to initiate full positions. Consider scaling into positions a little at a time to limit your risk in case we do see a long, overdue pull back. Economic data next week is pretty sparse. The big event is probably Cisco Systems (CSCO) earnings report on Wednesday night.

- James