Traders are selling the rallies as investors turn nervous ahead of this week's upcoming FOMC meeting. The June 6th rebound in the S&P 500 off its rising 50-dma didn't get very far before rolling over. This past Thursday saw a similar bounce but there was no follow through higher on Friday. For the week the S&P 500 lost -1.0%. The U.S. dollar continues to plunge, with the dollar now down four weeks in a row. Normally this dollar weakness would be bullish for commodities but the precious metals are not really moving. Gold managed a meager +0.4% gain for the week while silver, which was oversold, turned in a +1.5% oversold bounce. Oil rallied but the gains in oil could have been boosted by rising geopolitical worries in the Mid East.

It was a quiet week for economic data. The Producer Price Index (PPI) showed wholesale-level inflation rising +0.5% in May after a two-month decline. Core-PPI only rose +0.1%. The weekly initial jobless claims came in at 334,000, which was down from 346K. The University of Michigan Consumer Sentiment index fell from a five-year high in May of 84.5 to 82.7 at June's preliminary report. Economist were expecting a rise to 86.0 but the present conditions component reversed with plunge from 98.0 to 92.1. That's the biggest one-month drop since August 2011.

CNBC ran a story most of the week about the early release of economic data to high-end (mostly institutional) traders willing to pay for the information to get it prior to the public. We are not talking about very much time. In some cases the difference was only two seconds but when Wall Street firms are trading in nanoseconds it seems to be an unfair advantage. This revelation could negatively affect retail investor sentiment who might feel the markets are rigged against them. Another downer was the International Monetary Fund (IMF) and their growth downgrade. The IMF has kept their 2013 U.S. growth forecast at +1.9% but they lowered their 2014 forecast down to +2.7% from +3.0%.

It was a quiet week in Europe and Asia as well. The Eurozone industrial production numbers rose +0.4%, which was improvement. The Eurozone CPI rose +1.4% year over year. This week we will see headlines when President Obama meets with German Chancellor Angela Merkel.

The Chinese markets were closed most of the week for the nation's dragon boat festival. Most of the fireworks were in Japan. The NIKKEI index saw a -6.4% plunge on Thursday, pushing the Japanese market deeper into bear-market territory. The recent peak for the NIKKEI was May 22nd. Japanese investors were unhappy with the Bank of Japan's latest policy statement. Plus, investors now have to worry about their bank deposits. A story surfaced last week that the Japanese Financial Services Agency might consider a "bail in" strategy if the country sees any bank failures. It was only a few months ago that the small European country of Cyprus robbed their own citizens to save the banks. Instead of calling it a bail out the term bail in was used since they strategy uses depositor money to support the failing bank.

Looking at China the country said their Consumer Price Index (of inflation) only rose +2.1%, which was less than expected. The World Bank lowered its Chinese growth forecasts from +8.4% to +7.7% for all of 2013. Elsewhere in the region there was good news with North Korea and South Korea agreeing to hold talks to help alleviate the latest escalation between the two countries.

Major Indices:

The S&P 500 index continues to bounce off technical support at the 50-dma. Traders should note that multiple tests of support tend to weaken it. While the index bounced off its midweek lows it failed to break through the four-week trend of lower highs. This narrowing or coiling in the index between short-term lower highs and longer-term higher lows will eventually see a breakout one way or the other. The catalyst for the breakout will likely be the FOMC decision on Wednesday or Bernanke's testimony that same afternoon.

If the large-cap S&P 500 index can breakout higher past the trend of lower highs then it might retest resistance in the 1675-1680 region. If that level falls then 1700 could be round-number resistance. On the other hand if the index breaks down then 1600 could be round-number support but I would expect it to fail. That probably means a dip to the 1550-1540 area before finding support.

chart of the S&P 500 index:

The NASDAQ composite lost -1.3% for the week. It too has a short-term four-week trend of lower highs. Although the consolidation in the NASDAQ looks more like a bull-flag consolidation pattern. A breakout through the trend of lower highs would be a new bullish buy signal.

Technically there is probably resistance at 3500 and 3525. Meanwhile the 50-dma near 3375 could be support. The 3350 level and the 3300 level are also potential support on a pullback.

chart of the NASDAQ Composite index:

Surprisingly the small cap Russell 2000 index is holding up the best. That's a good sign since it suggests that mutual fund managers haven't panicked yet. The four-week consolidation has been a low more shallow. If the $RUT can break the trend of lower highs it might spark a wider bullish move higher for the market.

The 1000-1008 area is still overhead resistance. If that level breaks then the next resistance area could be 1020 or even the 1040-1050 zone. The 960-950 area is probably short-term support. If the market breaks down then look for support near the 900 level or its 200-dma.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week we will see both the Philly Fed and New York regional surveys. Yet the real event this week will be the two-day FOMC meeting. No one expects the Federal Reserve to change interest rates (currently in the 0.0% to 0.25% zone). However, what the Fed says in its policy statement on Wednesday afternoon will be a market moving event. Although any reaction to the Fed statement might be postponed until after the Fed chairman Ben Bernanke holds his press conference later that afternoon.

Everyone wants to know when the Fed will begin "tapering" their QE purchases. Will be it be soon? Will it be next year? What is the Fed looking for before they begin tapering? Of course the Fed has already said they want to see a few months of +200K job growth or unemployment at 6.5% or inflation above 2.5% before they make any moves but it seems like Wall Street has forgotten these prior guidelines. It is worth noting that Wednesday's Fed statement will also provide the Fed's updated economic forecast for U.S. growth.

Believe it or not but Q2 earnings season will be here in a month. The next two or three weeks could see a number of corporations warning prior to their official results.

Economic and Event Calendar

- Monday, June 17 -
G-8 meeting continues
New York Empire State manufacturing survey

- Tuesday, June 18 -
Consumer Price Index (CPI)
housing starts & building permits
FOMC two-day meeting begins
German ZEW sentiment numbers

- Wednesday, June 19 -
HSBC Chinese manufacturing PMI data
FOMC two-day meeting ends: interest rate decision
Fed Chairman Ben Bernanke's press conference

- Thursday, June 20 -
Weekly Initial Jobless Claims
Eurogroup meeting
existing home sales
Philly Fed regional survey
Eurozone manufacturing PMI data
Eurozone consumer confidence

- Friday, June 21 -
The first official day of summer (summer solstice)

Additional Events to be aware of:

July 4th, U.S. markets closed for holiday
September - U.S. debt ceiling deadline

The Week Ahead:

The week ahead will be all about the Federal Reserve and what the Fed and Bernanke may or may not say in their official statement and his press conference. Seriously, it will be the topic for Wall Street 24/7 for the next three days. I would expect the U.S. stock market to trade sideways until Wednesday afternoon. How the market chooses to interpret the Fed's statement will be the catalyst for market direction, potentially for the rest of the summer.

Elsewhere geopolitical risks are rising. I've been warning readers that if the U.S. or Russia gets involved with the civil war in Syria it could have much larger consequences for everyone. Just this past week President Obama announced that the U.S. would indeed get involved by providing arms to the Syrian "rebels" fighting President Assad's regime.

Why is the U.S. getting involved? According to the U.N. they have proof that the Syrian government (Assad's government) used chemical weapons on its people. More specifically, out of the 92,000 dead over the last two years, there is evidence of 100 to 150 people dying from chemical weapons. According to Obama, this is the "red line" that Syria was not supposed to cross or we would get involved.

Part of the problem is that almost no one in the region believes this whole "red-line" being crossed story. Many see it as just an excuse for the U.S. to get involved and justify its actions. Think about it. Who would have more to gain from Syria using chemical weapons on its enemies? Would it be the Syrian government or the rebels? Some have suggested the "rebels" used chemical weapons just to get the U.S. involved.

I warned you that this was quickly becoming a proxy war between the west (the U.S. and U.K.) and the east (Russian and Iran and Hezbollah). In reality we are getting involved in a massive Sunni-Shiite Muslim conflict that's been going on for over 1,500 years. The U.S. just picked sides with the Sunnis. That means we will be supplying arms to the "rebels". Unfortunately these rebels are essentially "al Qaeda". Can you imagine how surreal this is to see the U.S. giving arms to al Qaeda when it was al Qeada who flew planes into the World Trade Center on 9/11?

Russia has consistently warned us not to get involved or they would have to step in and support their ally Syria (Assad's government). Iran has also pledged support and new headlines suggest that Iran has promised to send 4,000 Iranian Revolutionary Guards to Syria to help Assad win. You can also bet that this is going to cause trouble in Iraq since Iraq is mostly Shiite. I will confess I am not a Mid East policy expert but whatever your beliefs this situation is about to escalate and it could have unintended consequences.

When it comes to my market outlook, the larger trend is up but everything depends on the Fed statement and Bernanke's press conference on Wednesday. If the Fed disappointments the market we could see a painful sell-off by week's end.