Less than one point! That was the S&P 500's best attempt at an oversold bounce to end the six-week losing streak. Technically this fractional gain for the week does snap the market's multi-week decline but the trend is still down. I had warned readers to expect a drop toward the simple 200-dma and the S&P 500 tagged this technical support on Thursday afternoon. Stocks are getting pushed around by a number of crosswinds. The issue with Greece continues to take center stage. We're feeling the effects of Japan's supply chain problems. Inflation at the consumer level is on the rise both here and abroad. A week ago it seemed that China would be successful in engineering a soft landing for its economy but worries are back that it will be a much harder landing. If China has a hard landing it will impact the entire globe.

One thing that did change last week was the action in the volatility index (VIX). After weeks of consolidating sideways under the 20 level the VIX finally broke out suggesting traders are growing less complacent about the market and actually starting to get a little fearful even as the market tried to bounce. We need to see a capitulation type of day to end this correction but that hasn't happened yet so the correction probably isn't over. The S&P 500 is down about -6.6% from its highs. We probably need to see a pull back into the -8% to -12% range before stocks actually bottom.

Daily chart of the Volatility Index:

Greece remains the biggest headache for the markets. The bickering among EU leaders appears to be ebbing as French and German leaders came to an agreement on new terms for the next Greek bailout. Until they sign the check for that bailout it's just talk. People have been predicting that Greece would eventually default for a long time now but that idea, that Greece has no way to ever pay back its loans and will have to default, has been gaining traction this past week. While EU and ECB leaders say they won't allow it to happen the market is certainly expecting a default to happen. The problem is that while some pundits claim a Greek default has already been priced into the market we really don't know that it has. All of the myriad repercussions of such an event are unknown.

European banks own tens of billions of Greek debt. Some put the estimate at more than $150 billion. The major U.S. banks also own tens of billions of debt but to a much smaller extent than their EU brethren. What is not known is how much all of these banks owe or own in Credit Default Swaps (CDS) agreements. When these banks bought the Greek debt they also bought CDS to protect themselves and that means another bank had to sell them that CDS. It has become this huge spider web of intertwined counter-party risk of CDS liabilities and no one knows how much because these are unregulated. If Greece defaults then some of the major European banks could go bankrupt and when they go bankrupt they'll spark more bankruptcies across the continent. Those banks that are "too big to fail" will likely be nationalized by their countries but the rest of the financial institutions will be out of luck. Pick your favorite metaphor. This is a flimsy house of cards or a domino ready to spark a collapse of dominos.

Fortunately it seems that the Greek problem might get kicked down the road yet again. Unfortunately it's not going away any time soon. The credit rating agencies are still downgrading the other PIIGS countries, which merely reminds investors that Greece isn't the only problem and the EU still has bigger problems with Italy, Ireland, Portugal and Spain. It's quite possible that when it comes time for the strongest EU members to hand over the next round of Greek bailout money they will say no and instead keep that money to prop up their failing banks that might go under when Greece eventually defaults. If you were in their position and your constituency was getting angrier and angrier with your country's support for Greece, would you continue to have over billions of euros to Greece knowing you'll never see it again or would you try and support your local financial institution?

At the same time the latest economic data in the U.S. continues to disappoint. The New York Empire manufacturing survey for June plunged from 11.9 to -7.8. Negative territory means a contracting economy and this is the lowest level since November. The Philly Fed survey also fell into contraction territory with a drop from +3.9 to -7.7. Back in March the Philly Fed was up at 43.4. The combination of both surveys falling into negative territory raises new fears that the U.S. could face a double-dip recession.

The recent consumer sentiment numbers were disappointing with a drop from 74.3 to 71.8. Economists had been expecting a dip to 74.0. The U.S. consumer price index (CPI) is running hot at +3.6% a year. This is the highest level since late 2008. The weekly initial jobless claims came in at over 400,000 for the tenth week in a row. With economic data falling off a cliff there will be a huge focus on Ben Bernanke's press conference on Wednesday.

Last week I warned readers to expect the S&P 500 to drop toward technical support at its 200-dma. This happened on Thursday. Friday's oversold bounce from support stalled at the 10-dma. There is a chance, now that options expiration is over, that the S&P 500 might continue to rebound from its 200-dma but the overall trend is still down. At this point I still think there is a good chance we'll see the S&P 500 test its March lows near 1250. If the 1250 level breaks then we're looking at a drop toward the 1200 area.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

I also cautioned readers to expect the NASDAQ to fall to the 2600 level. Sure enough this tech-heavy index broke down under its simple 200-dma and hit support near 2600 on Thursday. Friday's oversold bounce failed near 2650 and its 200-dma. I do still think there is a decent chance the NASDAQ can muster a short-term oversold bounce from the 2600 level but I would not launch new long-term trades here. Nimble traders may want to consider short-term bullish trades with a tight stop loss. Broken support near 2700 could be new overhead resistance.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

As expected the small cap Russell 2000 index (and the Russell 2000's ETF, the IWM) found support near 780 (78.00) and its 200-dma. This coincides with the March lows. On a very short-term basis you could argue the small cap index has produced a bullish double bottom but we need to see a stronger rebound from these lows. A close over 800 (80.00 for the IWM) might suggest the $RUT has found a bottom but there is overhead resistance at the 50-dma and 100-dma. I would remain very, very skeptical of any bounce here at least for the next two or three weeks.

Daily chart of the Russell 2000 ETF (IWM)

Weekly chart of the Russell 2000 ETF (IWM):

The SOX semiconductor index has continued to breakdown. The early bounce attempt on Tuesday failed at new resistance at the 200-dma. The only good thing here is that the SOX is growing more and more oversold and should try and bounce soon, probably near 380 or the 375 levels.

Weekly chart of the SOX semiconductor index:

The sell-off in the transportation sector stalled last week. This is one sector that did manage an oversold bounce and you can see from the weekly chart below that it is testing its long-term trendline of higher lows. A breakdown under this level would be very bearish. Not shown is the simple 200-dma, which is just above the 5,000 mark.

Weekly chart of the Transportation index:

This week the economic calendar is pretty light but we do have a two-day FOMC meeting and Fed chairman Ben Bernanke's press conference on Wednesday after the FOMC announcement that day. Here are some of the highlights:

-Tuesday, June 21-
Existing Home Sales for May

-Wednesday, June 22-
earnings from FedEx (FDX)
FOMC interest rate decision (12:30 P.M.)
Ben Bernanke's press conference (2:00 P.M.)

-Thursday, June 23-
weekly initial jobless claims (last week was 414,000)
New Home Sales for May
earnings from Oracle (ORCL)
earnings from Micron (MU)

-Friday, June 24-
Q1 GDP (third estimate)
Durable (goods) Orders for May

Naturally the most important events of the week will be the FOMC meeting and Bernanke's press conference on Wednesday. No one expects any changes to monetary policy so the focus will be on the Fed's statement. Shortly thereafter it will be followed up with the press conference. Many people expect the Fed to downgrade their GDP estimates so you can expect Ben to be grilled over that decision. It would not surprise me to see the stock market stall and drift sideways on Tuesday and then Wednesday morning as investors wait for these events. Volatility is likely to rocket higher after the FOMC announcement and after last week's "gain" in the stock market we could see the FOMC meeting kick-start the sell-off lower again.

There is a chance that stocks could see some end-of-quarter window dressing now that options expiration is over but even if stocks do see any window dressing I would expect it to be mild. Once we get past the FOMC event on Wednesday the market's attention will turn toward the jobs report data in early July and then the beginning of Q2 earnings season. Corporate results and guidance will either end this correction and begin a new leg higher or results will renew the market correction push stocks lower still. We are approaching the busiest three weeks of earnings warning season. That means every day could have an unexpected landmine go off and jolt stocks lower on some high-profile warning.

In summary the major averages have reached support but the trend is still down. Will they rebound and end the second quarter on an up note? Or will stocks continue to sink fueled by earnings warnings and failing economic data? Of course there is the third option that stocks chop sideways for a while. Although I doubt stocks would move sideways for too long not when the Fed decision and Ben's press conference offers a great excuse to sell stocks again.

Why buy stocks now when we might see a better entry point lower in two to four weeks down the road? Investors might want to wait and see how the market reacts to the first week or two of earnings data before considering any entries. Furthermore we have the end of QE2 coming up so the first half of July could be volatile as investors adjust to the end of this stimulus.

Even if stocks bounce I still think it gets worse before it gets better!

- James