Are you seasick yet? The last couple of weeks have definitely seen an increase in market volatility. Investors are reacting to conflicting headlines between violence in Libya and the Mideast, strong economic data in the U.S., and spiking oil prices. Tuesday's big drop was alleviated by Thursday's rally - the best one-day gain in the markets in three months.

The rumors midweek that Libya's Gaddafi had accepted a peace plan proved to be false. The White House is calling for Gaddafi to step down, which is unlikely to happen as the country of Libya has apparently fallen into a state of civil war. Over the weekend the pro-Gaddafi forces found success in their attacks on nearby rebel-held cities while the rebels were successful in their push toward the oil-production areas of the nation. Meanwhile violence and protests are picking up again in the countries Yemen and Bahrain.

The big headline on Friday was the U.S. non-farm payrolls report. Expectations for this report had been rising on a weekly basis and by Friday economists were looking for a gain of +178,000 jobs in February. The headline number came in at +192,000. It was slightly better than expected but much lower than the +220K to +250K whisper numbers that had been circulating last week. Overall the U.S. did see a gain of +250,000 jobs thanks to upward revisions in December and January.

The government's (U3) unemployment rate fell from 9.0% to 8.9%, a surprise bonus but this was largely due to a drop in the participation rate of the labor force. If you stop looking for work the government doesn't count you as part of the labor force. The total unemployment rate or U6 rate is still at 16.7%. Another concern inside Friday's jobs report was the lack of improvement in the average hours worked and average hourly pay. Both of these were flat. Normally we want to see these statistics rising as a precursor to more permanent hiring by businesses.

In addition to the jobs number the factory orders for January released on Friday was better than expected. Earlier in the week we also saw positive news for February vehicle sales, which rose to the highest levels since August 2008. The ISM figures were outstanding. The ISM manufacturing survey rose to its highest level since May 2004 and the ISM services index rallied to its best levels since August 2005. The parade of economic data remains very, very positive. More than once this week I heard analysts talking about how businesses (and stocks) are in the "sweet spot" with an accommodative FOMC, rising earnings, and improving economic growth. Overall expectations for 2011 remain pretty bullish. Everyone seems to be worried about 2012 as the year stocks and the economy will struggle.

That does not mean it will be smooth sailing in 2011. Thus far investors have been pretty accepting of higher oil prices. Brent crude oil futures hit $116 a barrel on Friday. The WTI contract is nearing $105 a barrel. Yet if oil continues to climb or remains elevated we could see a real problem. The huge jump in oil has produced a 30-cent rise in gasoline prices in the last two to three weeks. 30-cents a gallon has a HUGE impact on how much money U.S. consumers have available for other purchases. The average price at the pump is around $3.35 a gallon right now. There are certain parts of the country that are already paying close to $4.00 a gallon. Gas is on the rise overseas as well with fuel in the United Kingdom near $8.00 a gallon. A recent Bloomberg article listed gasoline in the U.K. at 1.30 pounds (about $2.10) a liter, with more than 80 pence of this in taxes. With 3.78 liters in a gallon that's $7.94 a gallon. Eventually higher oil and fuel prices will have a negative impact on consumer spending, which is widely quoted as 70% of the U.S. economy. Unfortunately, I do not know what the magic number is for the price of oil that will finally spark the sell-off and reversal in stocks. For the moment the stock market's (and oil's) trend remains higher.

Last week the S&P 500 index retested technical support near the 1300 level and its rising 40-dma. The index also tested short-term resistance and failed near the 1330 area. The battle lines are pretty clear. I'm looking at 1330 and 1350 as resistance overhead. 1300 and 1275 as support on the way down. Honestly, if we see the S&P 500 close under the 1300 mark I believe this would portend a much deeper correction in stocks. If that were to happen we could see the S&P 500 drop toward 1250 or 1225. A pull back near 1225 would line up pretty closely with a normal 38.2% Fibonacci retracement of the rally off the August lows. I want to repeat that I'm not predicting a correction that low but if the market breaks down that could be a downside target. On the upside if the S&P can get past the 1350 level then we're looking at the 1400 level as the next major milestone with a pause or two along the way.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite found support at its rising 50-dma this past week. It also failed at short-term resistance near 2800 again. The trend of higher lows is still bullish but momentum indicators are naturally waning. Now the February high near 2840 will probably be resistance. If the rally continues then the NASDAQ could try and hit the 2007 high near 2860. There are plenty of levels where the NASDAQ might find support if the market rolls over but the key levels for me are the 2600 area and the 2540 zone.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The semiconductor sector garnered some positive analyst comments last week. Overall the general trend is still higher for this key sector. Yet technically the up trend is in jeopardy. The bottom of its prior bullish channel is now resistance but this doesn't mean the group can't continue to climb.

Daily chart of the SOX semiconductor index:

Not much has changed for the small cap Russell 2000 index. Investors continue to buy the dips, which is very encouraging but I will point out that some of the longer-term momentum oscillators are naturally starting to waver and roll over. Technically the $RUT has found support near its 50-dma and the index looks poised to rally higher. Yet there is short-term resistance near 840 and long-term resistance in the 850-855 zone. It could take a while for the Russell 2000 to chew through resistance near the 850 area.

Daily chart of the Russell 2000 index:

Weekly chart of the Russell 2000 index:

The surge higher in oil prices has taken its toll on the transportation sector. High fuel costs can crush the airline industry and it certainly hurts the truckers. No one is immune but the railroads are probably the most efficient with their fuel costs, moving more freight per gallon of gas, and thus far the rails are holding up reasonably well (look at a chart of the Dow Jones Railroads Index: DJUSRR). If the transportation index fails it will likely drag the rails down with it. Furthermore, Dow Theory followers believe that we can't have a sustained market rally without this group and a breakdown here could herald a steeper correction in the wider market.

On a short-term basis the transports produced a bearish reversal two weeks ago but did not see any follow through lower. The oversold bounce has failed at technical resistance near the 30 and 50-dma. A move back above the 5100-5150 zone might alleviate fears of a sell-off in the transports. Whether you trade stocks in this group or not it remains a sector to watch.

Daily chart of the Dow Jones Transportation index:

Weekly chart of the Dow Jones Transportation index:

Looking ahead the economic calendar is a lot lighter than last week. The two biggest events are probably the weekly initial jobless claims and the Michigan Sentiment figures for March. On a positive note the weekly initial jobless claims have come in under the 400,000 mark for three out of the last four weeks and is expected to come in at 382,000 this week. This is a positive trend. In economic news we will also hear the wholesale inventory number, trade balance figures, February's retail sales numbers, and January's business inventories.

Unfortunately the biggest "event" this week will probably be the widely anticipated "Day of Rage" protests in Saudi Arabia scheduled for Friday, March 11th. Iraq had a day of rage protest in February. Yemen held their day of rage on Tuesday. The global markets are mostly focused on Saudi's "day of rage" because they are the world's key oil producer. The Saudi government has banned all forms of protests ahead of this event and plan on having thousands of security forces and police ready to quell any uprising. Meanwhile crude oil prices are unlikely to retreat until after this day has pasted.

Oil prices and the ongoing violence across the Mideast will remain in the spotlight this week. Rising oil prices have preceded any recession here in the U.S. If oil doesn't retreat soon we will hear more and more analysts raising concerns about a slowdown in what has turned into a very healthy (albeit slow job growth) recovery.

This week is also the two-year anniversary of the 2009 bear-market low. It will be interesting to hear if the main stream media chooses to put a bearish or bullish spin on this anniversary. Last week I pointed out that the S&P 500 has seen its fastest +100% gain ever off the 2009 lows. Historically you could argue that stocks are overbought and due for some profit taking. Yet bulls will claim that the market is in the "sweet spot".

- James