There was no lack of headlines last week. Unless you have been living under a rock you probably know that Osama Bin Laden is dead. That headline crossed the wires on Sunday night a week ago. Yet the Bin Laden bounce in the stock market was very short-lived as stocks rolled over midday on Monday. This began a weeklong correction lower. Almost nothing was spared and commodities were hardest hit.

Economic data this past week was mixed. There is a growing concern that the U.S. economy has hit a soft patch. That doesn't bode well since the second and third quarters tend to be slower. Weekly jobless claims continue to tick higher. Yet the government's nonfarm payroll (jobs) report on Friday came in better than expected. The headline number showed +244,000 new jobs created in April. Economists were only expecting +145,000. It looks like a blow out number. Unfortunately the unemployment rate ticked higher because 235,000 people started looking for work again, thus increasing the size of our workforce. This increase makes the April number look like we broke even. Yet the household survey, which is separate from the nonfarm payroll survey, showed that full-time employment fell -291,000 for the month.

I warned readers a week ago that stocks were due for some profit taking. This newsletter also cautioned that precious metals were overbought and due for a pullback but the vicious drop in gold and silver was a lot stronger than expected. During the month of April gold rallied +8% and silver surged +22%. Yet this past week gold gave back -4.6% and silver plunged -27%. The sell-off in silver grabbed the most headlines.

The CME Group, which owns the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange, raised the margin requirements to trade silver futures five times in nearly two weeks. This had to be shocking to anyone who has been trading silver lately and the new requirements exacerbated the sell-off. Since traders were looking for something to sell to meet their margin calls the drop in silver probably influenced all the commodities and most likely played a significant part in the very sharp drop in crude oil on Thursday.

Adding insult to injury was a drop in the euro currency and a very big bounce for the U.S. dollar. Shorting the dollar was a very, very crowded trade. The volatile moves in the euro and dollar were huge! Currency moves are measured in pips and the reversal in the euro was close to 600 pips. Forex traders can be leveraged anywhere between 10 and 100 times. The sharp reversals in currencies and commodities were brutal. Investors were losing fortunes or making a fortune if you were on the right side of the trade. There is a story circulating that back in April someone bought $1 million worth of put options on the SLV silver ETF. Sadly that million-dollar trade wasn't me but the Option Investor newsletter did have a very successful put trade on the SLV this past week.

Weekly Chart of the U.S. dollar index:

Weekly Chart of the GLD gold ETF:

Weekly Chart of the SLV silver ETF:

The timing of the stock market decline might make one think the sell-in-May crowd is still alive and well. I believe that's just a coincidence and investors can use this pull back in the major averages as a new bullish entry point. The late day spike lower on Thursday was just enough for the S&P 500 index to hit the 50% retracement of its late April rally. The index closed on support near the 1340 level on Friday. This looks like an entry point but more conservative traders could wait for a bounce from the 50-dma or a new close over 1350.

Daily chart of the S&P 500 index:

The NASDAQ-100 index (NDX) is less than 1.5% from its highs set in late April. The biggest tech stocks haven't seen that much of a correction. The NASDAQ composite isn't that far behind. The composite has essentially seen a normal 38.2% Fibonacci retracement of its late April rally. Overall the trend is still up. Could the NASDAQ correct lower? Of course but we can look for support at the 2800 level and the 2750 area, which is now underpinned by its 50-dma. I would actually be a little surprised to see the NASDAQ composite close under the 2800 level this week.

Daily chart of the NASDAQ-100 index:

Daily chart of the NASDAQ Composite index:

I would still keep an eye on the SOX semiconductor index. Fortunately the group has been showing decent strength. I suspect investors will continue to buy dips in this sector. Meanwhile I'd rather focus on the small cap Russell 2000 index. Technically the $RUT (and the IWM ETF) has produced a bearish engulfing candlestick pattern on the weekly chart. This is a warning signal but these patterns normally need to see follow through. Fortunately the small cap index found support near its 50-dma and I'm expecting a bounce.

Daily chart of the IWM Russell 2000 ETF:

This week is another busy one for economic data but nothing as large as the jobs report we just saw on Friday. Some of the highlights will be the import/export prices, wholesale inventory numbers, trade balance, PPI and CPI, and Michigan Sentiment numbers. The big ones to watch are probably the PPI on May 12th and the CPI on May 13th since the market is still concerned about inflation. Corporate earnings are winding down but Cisco Systems (CSCO) will make headlines when they report on Wednesday.

Investors will continue to cast a wary eye on Europe. This past week witnessed volatility thanks to rumors that Greece would leave the Eurozone. The country quickly denied these rumors but Greece will remain in the spotlight. Many analysts believe it's only a matter of time before Greece defaults on its debts. Yields for government debt from the rest of the PIIGS countries remain elevated as investors demand more reward for their risk.

We have already discussed the end of QE2 coming up at the end of June. It remains the only significant milestone to watch between now and the Federal Reserve's semi-annual review before congress in midsummer. Now that earnings season is pretty much over investors will once again refocus on economic data. Fortunately the bulls have gotten pretty good at climbing the wall of worry so the current soft spot in the U.S. economy might just be fuel for the fire under this bull market.

- James