Stocks ended a two-week sell-off with a mild gain for the week. Leadership was not very broad. The NASDAQ composite was an exception to the market's bounce with a -0.3% drop for the week. Prior big cap technology leaders like AAPL, GOOG, and PCLN all underperformed and weighed heavily on the NASDAQ-100. By the end of the week the U.S. dollar faded lower. The euro ended on a high note. Gold drifted sideways. There was very little movement in oil following the U.N. Security council meeting with Iran last weekend.

Economic data in the U.S. was underwhelming. Initial jobless claims came in at 386,000. Economists were expecting a drop from 380K to 375K but last week was actually revised higher to 388K. The existing home sales number fell to a lower than expected 4.48 million pace in March, down from 4.60 million pace in February. One of the biggest disappointments was the Philly Fed survey, which dropped from 12-month high of 12.5 the prior month to 8.5 in April. Economists had been expecting a dip to 10. The new orders component of the survey plunged to 2.7, the lowest level since September. Yet the employment component surged from 6.8 to 17.9.

In Europe the focus was all about Spain and its upcoming debt auction. Traders were either hot or cold on the prospects for Spain, which helped fuel the volatility in the equity markets. Monday saw yields on Spanish 10-year bonds hit 6.1%. Remember, the key level to watch is 7% where it is generally believed that a country can't service its debt with rates above 7% so crossing the 6% level is definitely a warning signal. On Tuesday Spain had a very successful debt auction but it was for short-term 12-month and 18-month bonds. The big event was Thursday where Spain auctioned off 2.54 billion euros worth of 10-year notes. Yields had dropped to 5.74% with "solid" demand as one news source put it but other market watchers thought the bond sale was "staged." Conspiracy theorists believe that the powers at be made sure Spain had a successful auction so as not to spook the markets.

Major Indices:

The S&P 500 index eked out +0.6% gain for the week, ending a two-week slide. yet the action last week still looks bearish. Looking at the chart below you can see that the index appears to be forming a bear-flag consolidation pattern. A breakdown under short-term support at 1370 will probably signal a drop to 1340. If 1340 fails then we're looking at a drop toward the 1300 area.

Daily chart of the S&P 500 index:

60-minute chart of the S&P 500 index:

The NASDAQ Composite and the NASDAQ-100 index were both plagued by selling pressure in the big cap technology names. Traders were selling into strength and prior short-term support is now new short-term overhead resistance. The index looks poised to drop toward the 2900 area. A breakout higher past 3060 might signal a bullish reversal but currently the short-term path of least resistance is down.

Daily chart of the NASDAQ Composite index:

60-minute chart of the NASDAQ Composite index:

We are seeing a similar bear-flag consolidation pattern building in the small cap Russell 2000 index. There is overhead resistance at the 50-dma and the 820 level. There is potential support at the 100-dma as well as the 200-ema and 300-dma (all visible on the daily chart below). I suspect that a breakdown from this flag pattern will signal a drop toward the 760 area and its simple 200-dma.

Daily chart of the Russell 2000 index

60-minute chart of the Russell 2000 index

It's not surprising that the bounce in the Dow Jones Transportation index failed at its prior tend line of support. This also coincided with a rebound toward its early April high. Right now this sector does not have a clear direction but you can almost see a pattern of lower highs and higher lows, which is neutral. Future direction is going to depend on the price of oil and signs of economic growth (or lack thereof).

chart of the Transportation Average

We've been warning readers that AAPL appeared to be topping. Shares are now in correction territory, down more than -10% from its high. Volatility has increased substantially and will likely continue until AAPL finds support again. The stock settled on its 50-dma so it could see another oversold bounce come Monday. However, the short-term trend is down and I am expecting a drop into the $525-500 zone. With AAPL correcting lower it's going to be harder for the NASDAQ and the technology sector to turn higher.

Don't forget that AAPL reports earnings on April 24th, after the closing bell. You can bet the stock is going to see some post-earnings volatility the next morning (up big or down big, or both).

Daily chart of the Apple Inc. (AAPL)

We survived the first full week of Q1 earnings but we're about to see an avalanche of corporate earnings news. There will be hundreds of companies reporting. This is going to generate a lot of volatility for individual stocks. Thus far 82% of the 75 S&P 500 components that have already reported have beaten earnings estimates. That's better than normal but it was likely due to depressed expectations. Of the remaining 425 S&P 500 companies current estimates are for an average of -0.9% earnings growth. If you subtract AAPL from that figure the average falls to -2.3%. Investor sentiment could take a hit if we see a wave of disappointing earnings announcements.

Outside of the earnings parade the big events this week will be the FOMC meeting's conclusion on Wednesday and Ben Bernanke's press conference following the Fed's interest rate decision. No one expects a change in rates so the focus will be on any hint of QE3 or some other form of stimulus. Right now no one is expecting QE3 but some analysts are speculating the Fed might extend their Operation Twist, which expires at the end of June. The question is will the Fed announce something this week or at the next meeting in June? Another potential market mover is the first look at Q1 GDP. Economists are expecting the U.S. grew at +2.3% in Q1, down from +2.95% in Q4.

Economic and Event Calendar

- Monday, April 23 -
(nothing significant)

- Tuesday, April 24 -
FOMC meeting begins
Case-Shiller 20-city home price index
Consumer Confidence for April
New Home sales

- Wednesday, April 25 -
FOMC meeting ends, interest rate announcement
Ben Bernanke press conference
Durable goods orders

- Thursday, April 26 -
Weekly Initial Jobless Claims
Pending home sales

- Friday, April 27 -
U.S. Q1 GDP estimate
Michigan consumer sentiment (final reading for April)

Upcoming events:

May 6th - Greece national elections
May 6th, - 2nd round of French elections

The Week Ahead:

Monday morning the market's focus will probably turn towards Europe again. The first round of French presidential elections did not go well for incumbent Nicolas Sarkozy. According to polls on Sunday his socialist rival Francois Hollande beat him by three percentage points. Both candidates will move to the second round of the French presidential race on May 6th. The markets will likely worry that if Hollande wins then cooperation between the EU's two biggest countries, France and Germany, could deteriorate. Sarkozy has worked closely with Germany's Merkel to present a solid front against the EU's fiscal troubles. If Hollande is elected then the EU could find itself lacking the willpower for further bailouts.

Aside from the political game in France, I don't see a lot of changes from my comments a week ago. The U.S. market still looks tired. The fact that the high-profile tech names are starting to sell-off is not a good sign but sector rotation is normal. Of course market corrections are normal too but it's painful if you're long the market when it happens. I am expecting more volatility in the market this week but I suspect the result will be a breakdown to a new lower low as we head into May.

The Q1 U.S. GDP estimate this week is backward looking but it's going to have an impact on the market anyway. What is concerning is that recent economic reports seem to be showing a slowdown for the U.S. Combine that with a slowing China and a slowing Europe and investors have reason to be concerned. Now add the unknown of presidential races in France and Greece and the ongoing tensions between Iran and the West and we have a recipe for a volatile summer.

I remain bullish for the year as a whole but my bias for the next several weeks is down. Don't rush to launch new long-term bullish trades. We will most likely get a better position to buy into stocks cheaper down the road.

- James