Investors remain cautious on the market. Early last week stocks were in rebound mode and Tuesday was the best one-day gain for the S&P 500 since April 20th. Unfortunately the rally ran out of steam the following session and now the oversold bounce has almost been completely erased. The market's major indices are flirting with a breakdown under key support as investors digest a flurry of headlines from economic data to the ongoing drama with Greece.

Last week we had the FOMC meeting. The Federal Reserve left rates unchanged in the 0.0%-to-0.25% zone. The Fed also kept their extended period language and confirmed they will end the QE2 program at the end of June. There was no word on any potential QE3 program. During the following press conference Fed chairman Ben Bernanke admitted the Fed does not know why the U.S. growth is so frustratingly slow.

The FOMC also lowered their 2011 GDP estimates to the +2.7%-2.9% range down from +3.1%-3.3% but a downward revision was widely expected. The Fed raised their unemployment estimates into the 8.6-8.9% versus prior expectations for 8.4-8.7%. These comments didn't inspire a lot of confidence in the market.

The stock market was also unhappy with bearish PMI data out of both Europe and China. However, there were comments from Chinese officials suggesting the country might lighten up on their attempts to slow down their economy. While back at home in the U.S. another drop for new home sales failed to excite anyone.

In positive news the U.S. GDP Q1 growth estimate was revised higher from +1.8% to +1.9%. At this point Q1 data is getting to be old news. The first look at Q2 GDP will be in late July. Durable Goods orders for May rose +1.9% and followed an upwardly revised +2.7% from the prior month. Yet orders less transportation was only +0.6%, which was slightly less than estimates. Back across the Atlantic the latest IFO survey data in Germany was positive but European stocks remain hostage to the Greek crisis.

Speaking of this long, drawn out Greek tragedy, one of the main players, Greece's prime minister got to keep his job last week after he survived a no confidence vote. Now the prime minister has to wrangle his government into accepting the latest austerity plan. This was actually good news - that Greece has agreed with the EU and IMF to a new five-year austerity plan but this needs to be approved by Greek parliament. That vote is this week and if it fails then Greece may not get the money it needs in July to avoid a debt default.

Just when it seemed that the Greek problem might get a reprieve concerns over the rest of the PIIGS countries resurfaced on Friday. Moody's rating agency downgraded sixteen Italian banks over concerns they were undercapitalized. This fanned the flames regarding how weak Italy, Ireland, Portugal and Spain really are and reminded investors that even if the Greek problem gets solved (it won't) there are bigger challenges on the horizon.

Looking at the U.S. markets the S&P 500's bounce from the 200-dma on June 16th has reversed. This index actually retested the 200-dma on Thursday morning with a dip toward 1260. Traders bought this dip a second time and Thursday saw a sharp intraday rebound. By Thursday's closing bell the market look poised to rally again. Then the Italian bank downgrade hit and stocks reversed course yet again. In spite of all this volatility the volatility index (VIX) is only at 21. If the market breaks down under support we could see the VIX spike back toward the 30 level.

There are a lot of people watching the simple 200-dma as their buy/sell signal. A breakdown would be very bearish. Currently a breakdown under the 200-dma would likely involve a breakdown under support near 1260 as well. I would also point out that the March low near 1250 (actually 1249) could be significant support. If the S&P 500 does break 1250 then I would expect a decline toward support near 1220 and then the 1200 levels.

Daily chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The NASDAQ composite doesn't look much different. This tech-heavy index saw a stronger bounce early in the week but it stalled under the 2700 level. This index closed on its 200-dma near 2650 on Friday. Support remains near the 2600 level and a breakdown here would be very ugly.

Daily chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The rebound in the small cap Russell 2000 index still shows promise but I'm concerned there is overhead resistance at 820 and its 50 and 100-dma. Plus, this Friday was the once-a-year Russell rebalancing so Monday might see some volatility as the index adjusts to this rebalance. The $RUT has support in the 770-780 zone along with its 200-dma. A breakdown under this level would suggest a much deeper correction to follow.

Daily chart of the Russell 2000

Weekly chart of the Russell 2000:

The SOX semiconductor index is trying to bounce after its very sharp sell-off in June. Broken support near 410 and its 200-dma should be new overhead resistance. As long as this sector struggles the NASDAQ is going to have a hard time mounting a rally.

Weekly chart of the SOX semiconductor index:

The transportation sector saw a sharp rebound last week. Yet the rally reversed near resistance and now the index has produced a new bearish reversal pattern. I would expect another drop toward the 200-dma. A breakdown under the 200-dma or the 5,000 level would be very bearish for the market.

Daily chart of the Transportation index:

Weekly chart of the Transportation index:

This week the economic calendar is pretty busy. There is going to be a lot of data coming out. Here are some of the highlights:

- Monday, June 27-
personal income and spending

-Tuesday, June 28-
Case-Shiller 20-city home price index
Consumer Confidence for June

-Wednesday, June 29-
Pending Home Sales for May

-Thursday, June 30-
weekly initial jobless claims
Chicago PMI

-Friday, July 1-
ISM index for June
Michigan consumer sentiment
construction spending.

The biggest economic releases are the ISM on Friday and the Chicago PMI on Thursday. The Q2 earnings season doesn't officially start until July 11th with Alcoa's earnings report but we will see a few early releases. Major earnings reports this week are Nike (NKE) on Monday; GIS and MON on Tuesday; and DRI on Thursday. Don't forget that we could see any number of earnings warnings over the next couple of weeks prior to the onset of reporting season.

Looking ahead the first part of the week will probably be dominated by headlines of Greece again. Their parliament is supposed to vote on the new five-year austerity plan this Tuesday. After Tuesday the focus will be on the economic data at the end of the week. In the meantime we will probably hear a lot about the debt ceiling talks or lack thereof between the White House and congress. They have until early August to raise the debt ceiling before the U.S. does the unthinkable and defaults on our debt.

There is still a chance stocks could see some last minute end-of-quarter window dressing but I would not use a bounce here as a new entry point for long-term LEAPS positions. If we're lucky the stock market might consolidate sideways in a trading range until earnings season arrives in mid July. Then the fireworks should really start. Investors will be looking at corporate earnings and guidance to show us just how bad Q2 really was and whether or not corporate America agrees with the Fed that conditions should improve later this year.

In summary, the market's intermediate trend is still down. The major averages are likely to retest major support this week again. A breakdown would be very bearish. The headlines will still be dominated by events overseas and currency fluctuations between the dollar and euro will create volatility in commodities. I would not be in a rush to open new long-term bullish positions here. I'd like to see the market digest the first two weeks of earnings before making any big decisions.

- James