News that the violence in Libya has bloomed into a civil war has not derailed the stock market rally. Thus far investors have shrugged off the implications of rising oil prices on the U.S. and global economies. Traders managed to ignore the disappointing Q4 GDP revisions, which fell from +3.2% growth to +2.8% growth. Instead the focus remains on positive economic data. Last week the German Ifo institute's business confidence index, a survey of 7,000 executives and managers, rose to a new all-time high. Meanwhile back in the U.S. the final consumer sentiment number for February rose to 77.5, the highest reading since January 2008.

This does not mean we should ignore Libya. With the country in turmoil they're probably not pumping oil and any disruptions to the global oil supply will be painful. Rising oil tends to precede any recession here in the U.S. If crude prices don't pull back we're going to hear more and more about its impact on U.S. growth and consumer spending. In just a couple of months we'll be talking about the summer driving season when gasoline prices tend to rise, which would put further pressure on consumers' wallets.

The bigger problem is the unrest across the Mideast. The revolution in Tunisia was the spark that started this fire and spread to Egypt and now Libya. Citizens are already protesting the new government in Tunisia and there were new protests in Egypt this past week as well. While it looks like the king of Saudi Arabia manage to pacify his people with $35 billion in handouts, there is still civil unrest in Yemen and Bahrain and Iraq.

It's hard to imagine something more dramatic than a civil war but unless we do see something bigger than violence in Libya I suspect the market's focus will be on economic data here in the U.S. and we do have a lot of economic headlines coming this week.

Last week the S&P 500 index witnessed a 50-point drop (-3.7%) but traders were ready and jumped in to buy the dip near support at the 1300 level. Not only was this round-number, psychological support it was also support at the rising trendline of higher lows (see chart below). Until the trend breaks investors can use this pull back as an opportunity to launch new bullish positions. The next level of resistance is the 1345-1350 zone.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite saw a steeper pull back of -4.5% with the drop from 2840 toward the 2710 area. Traders bought the dip twice near the 2710 level, producing a mini-double bottom pattern. The rising 50-dma also lent some support and the index's trend remains higher. On a short-term basis the NASDAQ has potential resistance at its 10-dma and the 2800 and 2840 levels but I suspect the NASDAQ composite will make a run at its 2007 highs near 2860.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

We have been watching the SOX semiconductor index for clues as to how the NASDAQ might move. Profit taking in the SOX looked pretty severe and the index broke down from its narrow bullish channel. Yet just as quickly the index is bouncing back. Typically the bottom edge of the bullish channel, once broken, can become new resistance. We'll have to wait and see if that happens this week or if the chip stock continue to rally. I looked at several chip names and they all looked relatively healthy, which should bode well for this week.

Daily chart of the SOX semiconductor index:

The small cap Russell 2000 experienced a sharp, two-day drop but bulls were ready and bought the dip near round-number support around the 800 level and the rising 50-dma. This is what we expected. I suspect that the Russell 2000 index will try to rally toward its 2007 highs near the 850-855 zone, which might prove to be heavy resistance.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

The huge spike in crude oil prices has naturally had a very negative impact on the transportation sector since rising oil means rising fuel costs. On a short-term basis the Dow Jones Transportation index is bouncing from support but there has been some technical damage done to the chart.

Daily chart of the Dow Jones Transportation index:

This week we have a VERY full economic calendar:

--- Monday ---
Personal Income & Spending, Chicago PMI for February, pending home sales.

--- Tuesday ---
(national) ISM index for February, auto & truck sales, construction spending.

--- Wednesday ---
ADP Employment report for February, Federal Reserve's Beige Book report, Challenger, Gray & Christmas job cuts report.

--- Thursday ---
(national) ISM Services index for February, revised Q4 productivity, weekly initial jobless claims.

--- Friday ---
Nonfarm payrolls (jobs) report for February, Unemployment rate for February, Factor Orders for January, average workweek and hourly earnings for February.

Expectations for the jobs report are rising. Consensus estimates have risen from +170,000 jobs to +180,000 for the headline number. Many analysts are expecting the number to come in at more than +200K due to the massive blizzard in January pushing jobs into February. Private payrolls are expected to be even higher. Last month this report was a huge miss but it failed to knock the market down. Two months in a row could be a different story but we'll have to wait and see. Unemployment is expected to tick higher from 9.0% to 9.1% but we all know that's not the real unemployment rate, which is closer to 15-to-16%. Aside from the jobs report on Friday the big events will likely be the ISM reports and the Fed's Beige Book.

This weekend I read an interesting tidbit on the website. Two weeks ago there were a number of headlines about the S&P 500 doubling (+100%) off its 2009 bear-market lows. The article pointed out that this was the fastest +100% gain in the S&P 500 ever at just 712 days. The second and third fastest doubles in the S&P 500 took 890 days and 903 days. While I don't think the number of days here matter it helps illustrates just how overbought the market is. Don't get me wrong. I remain bullish on the market and expect stocks to resume their climb but eventually we will see another multi-week or multi-month correction. That might happen once the major averages hit resistance at their 2007 highs.

In the meantime we want to take advantage of the market's dip and consider some new bullish positions. More conservative traders will want to consider raising their stops. Everyone will want to re-evaluate their risk tolerance. Plan now for the unexpected. What will you do if the S&P 500 suddenly reverses lower and breaks support at the 1300 level or the 50-dma? We can play the trend but have a plan ready. Are you going to be exiting positions or preparing to buy the next drop to support?

- James

P.S. Keep an eye on the U.S. dollar. It's currently slipping lower but I'm wondering how much farther will it fall. Normally when geopolitical tensions rise the dollar rises since investors see it as a "safe haven" trade. That is not happening right now. Gold, on the other hand, is rising but the precious metal is nearing its previous highs. Will gold breakout or roll over? Will the dollar bounce at prior support or will it breakdown to new lows? The Fed's QE2 program is set to expire in June, which might relieve some pressure on the dollar. Yet prior to June we will see some interesting headlines out of Europe. Spain and Portugal need to roll over about 20 billion euros worth of debt. In June the EU is expected to announce their latest bank stress tests results. If the debt auctions for Spain don't go well the euro will fall and the dollar should rise.

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