The U.S. stock market ended a three-week losing streak with last week's widespread bounce. The S&P 500 index posted a +1.7% gain for the week in spite of rising concerns that Greece may exit the Eurozone. Europe remains the focus for market participants. Much of last week's gains came from a big oversold bounce on Monday, which may have gotten a boost from headlines out of the G8 summit last weekend where leaders expressed their desires to keep the Eurozone together (big surprise there, right?). By Friday's closing bell the NASDAQ Composite was up +2.1% for the week. The Dow Industrials were up +0.6%, the small cap Russell 2000 index +2.5%, and the Dow Jones transportation average was up +4.2%.

Concerns over the Eurozone pushed the euro currency toward a new two-year lows against the U.S. dollar, near $1.25. The greenback is nearing its January 2012 highs. Gold lost -1.2% for the week but it's hovering near support. Crude oil posted another weekly decline but it was only -0.1%. Oil looks oversold here and due for a bounce. Recent talks in Baghdad between Iran and a six-country coalition over Iran's nuclear activities didn't end well so I am surprised that oil has been so weak. Oil closed below $90 a barrel for the first time this year.

Daily chart of the Euro ETF:

Daily chart of the U.S. dollar Index:

Investors remain cautious with money still flowing toward safe haven securities. A week ago the U.S. ten-year bond saw its yield close at a record low of 1.7%. This past week saw a small pullback in bonds lifting the yield to 1.745%. Yet the German bond market saw an influx of money and the rally there pushed the yields on a German 30-year bund to under 2% for the first time in history. Speaking of Europe, EU leaders meet in Brussels again on Wednesday. The general message that most took away from that meeting was that individual nations need to prepare for a disorderly Greek exit from the euro. Not helping matters was the Organization for Economic Co-operation and Development (OECD) who adjusted their Eurozone growth forecasts lower.

Economic data in the U.S. was mixed. Weekly initial jobless claims are still coming in a little high at 370,000 last week. New home sales for April hit an annual pace of 343,000, which was slightly ahead of expectations. Existing home sales slipped to an annual pace of 4.62 million units, just under expectations. The U.S. durable goods orders rose +0.2% in April but ex-transports the report showed a -0.6% contraction. This was definitely weaker than expected.

The biggest data surprise for the week was probably the final reading on the University of Michigan's Consumer Sentiment survey for May, which rose to a four-year high at 79.3. Economists were only expecting a rise from 76.4 in April to 77.8 in May. The current conditions component and the expectations component both showed strong improvement. These individual components are at their highest levels since January 2008 and July 2007, respectively. Unfortunately we are not seeing positive data overseas. Manufacturing data out of France, Germany, the Eurozone and China all disappointed this past week. Meanwhile the World Bank cut their growth forecast for China.

Major Indices:

The market was due for a bounce after a sharp three-week plunge. The S&P 500 index had fallen toward its 300-dma a week ago Friday. Now the index is up four out of the last five days. Yet it's struggling to get past its simple 10-dma. Even if the bounce continues prior support near 1340 or 1360 should be new overhead resistance. My concern is that if stocks bounce it will trick traders into buying the bounce only to see the rebound reverse hard at one of these levels (1340, 1360).

There is no guarantee we will bounce. Stocks could churn sideways as investors wait for new data on the upcoming Greek elections in June, or the next Fed meeting, or Q2 earnings season in July.

The simple 200-dma near 1280 should offer additional support. Plus, a drop to 1280 would be a -10% correction from the 2012 highs. Naturally a close under 1280 would be seen as very bearish and would probably signal a drop toward 1250 and lower.

Daily chart of the S&P 500 index:

The NASDAQ composite produced a strong bounce last week but it too is having trouble getting past short-term resistance at its simple 10-dma. On the 60-minute chart below you can see that recent sessions have created a pennant-shaped consolidation. These are supposed to be neutral but more often than not the breakout continues with the previous trend, in this case that would be down.

The 2750 level is the key area to watch. It's near the 61.8% Fib retracement of the NASDAQ's big rally and it's also near the simple 200-dma, which should offer technical support. Prior support near 2900 is now overhead resistance.

Daily chart of the NASDAQ Composite index:

The small cap Russell 2000 index is also bouncing and also struggling with its 10-dma. The sideways chop this past week looks like the S&P 500. Yet the larger pattern is clearly bearish with a head-and-shoulders pattern. Broke support near 780 should be near resistance. The H&S pattern is currently forecasting a drop toward the 710 area.

Daily chart of the Russell 2000 index

It's a holiday shortened week for the U.S. with markets closed on Monday for the Memorial Day holiday. Plus, the monthly calendar rolls over this coming week. That means a wave of economic reports. The big headlines will be the ADP employment number, U.S. Q1 GDP revisions, and Chicago PMI on Thursday. Economists are expecting the GDP number to be revised to +2.3% growth but some are hedging their bets and expecting a drop under +2.0%. Then on Friday it's the nonfarm payroll (jobs) report. Analysts are looking for +175,000 new jobs created in May. So far this year the monthly jobs report has tended to disappoint to the downside. I would not be surprised to see stocks churn sideways until we get Friday's jobs number.

FYI: The IMF's quarterly review of Greece has been postponed from the end of May until after the June 17th elections.

Economic and Event Calendar

- Monday, May 28 -
U.S. markets are closed for Memorial Day holiday

- Tuesday, May 29 -
Case-Shiller 20-city home price index
Consumer Confidence for May

- Wednesday, May 30 -
Pending Home Sales data

- Thursday, May 31 -
Weekly Initial Jobless Claims
ADP Employment report for May
Q1 GDP (U.S., 2nd estimate)
Chicago PMI

- Friday, June 1 -
Nonfarm Payrolls (jobs) report for May
Unemployment rate
Personal Income and Spending
ISM Index for May
auto and truck sales

Upcoming events:

May 31st, Irish European fiscal compact referendum
June 17th, Greek elections
June 18-19th, Iran/multi-nation talks (Russia, U.S., China, France, U.K.)
June 19th, FOMC meeting
mid June 2012, IMF quarterly review of Portugal and Ireland

The Week Ahead:

Looking ahead the challenges in Europe and the Eurozone will remain in the spotlight. The Greek tragedy might be the current headliner but Spain is getting warmed up backstage for its debut with a tap dance around the cliff's edge of economic ruin. You've probably heard that the early May elections in Greece did not solve anything. The new government was unable to come together and form any sort of working coalition. This has prompted another round of elections scheduled for June 17th.

The majority of Greek citizens interviewed have expressed their desire to stay in the euro yet the anti-austerity, "we're going to leave the euro" party Syriza is gaining support. If this group gains a majority in the next elections it's going to cause raise a lot of fears that Greek might exit the euro sooner than anyone expects. The likely scenario is that some day in the future, over a weekend, the newly elected Greek government decides to jump ship, leave the euro, and re-launch their own currency (most likely reviving the drachma). This would cause economic shockwaves around the world even though more and more people are expecting this very event to happen. A recent Bloomberg survey showed more than 50% of investors expect Greece to exit the Euro this year. Just this past week the EU meeting in Brussels ended with leaders needing to plan for a messy Greek exit.

Meanwhile Spanish banks are sinking fast. It wasn't that long ago that Spain formed the Bankia Group as a merger of seven struggling banks. The thought was they would be stronger together than as individual entities. Well now Bankia is struggling with liquidity issues and asked the Spanish government for 19 billion euros in aid. Spanish banks are already under the gun to raise capital after Spain's economic minister has demanded the banks raise tens of billions of euros worth of new capital to strengthen their balance sheets.

All this worry about Spain's banks is pushing yields up on the country's bonds. Remember, that the level to watch is 7% yields on Spain's 10-year note, which is considered unsustainable. Yields are currently above 6%. Banks are the only problem for Spain. The real estate market is in shambles. Unemployment is soaring at 24% (over 50% if you're under the age of 25). If Greece leaves the euro you can bet Spain is going to consider it. The ability to print your own currency and de-value as needed might be considered a better alternative to unbearable austerity measures. The difference between Greece and Spain is significant. Greece has 11 million people and a $303 billion economy. Spain has 46 million people and $1.5 trillion economy. Unfortunately Spain's debt is already at 79% of its GDP, up from 68% in 2011.

What will the Federal Reserve do at their next June 19th meeting? Their Operation Twist is scheduled to close at the end of June. Do they extend their "Twist" program? Do they offer some form of QE3? That might depend on the jobs number this coming Friday. However, I suspect the Fed will not launch QE3 yet. They could be saving that bullet until after Greece exits the Eurozone. Then they could deploy QE3 to try and soften the blow from turmoil in Europe.

We will probably start to hear more and more about Iran as we approach the July 1st deadline. I mentioned earlier that recent talks between Iran and a multi-nation coalition to discuss Iran's nuclear activities did not fare well. Iran is already suffering significantly due to current economic sanctions. Oil exports are Iran's biggest revenue generator and the country sells about 600,000 barrels of oil a day to the EU. The EU is planning to stop buying oil from Iran with their oil embargo scheduled for July 1st. This is going to ratchet up the war rhetoric as a desperate Iranian leadership looks to rally the angry populous against the West. There have been constant rumors that Israel is considering a unilateral strike at Iran's nuclear facilities before the end of summer.

The only winner here is China who will play both sides of the Iran fence. China is part of the current multi-nation talks. They are also one of Iran's biggest customers for oil. You can bet China will wait until the very last minute prior to the July 1st EU embargo deadline and try to squeeze Iran for exceptionally cheap oil prices to take advantage of the situation. Talks between Iran, the U.S., France, U.K., China, and Russia are scheduled to resume on June 18-19th.

It's going to be an exciting summer. We could see a Greek exit, rising tensions with Iran, recessions in Europe, a slowdown in China, the upcoming U.S. presidential race, and then the looming U.S. fiscal cliff in January 2013. No wonder yields on U.S. and German bonds are near all-time lows. Investors are seeking safety. Goldman Sachs recently voiced their opinion that the S&P 500 is going to end the year near 1250, which is essentially flat for the year. That doesn't inspire a lot of confidence.

The intermediate trend is down. We could see another short-term bounce but general market trend has gone from buying dips to selling rallies. I would be very cautious when it comes to launching new bullish positions.

- James