December definitely started off on the wrong foot, but stocks bounced back from the worst of their losses amid grim economic reports that had the potential to send the market down to new lows.  Job cuts plagued the Street last Thursday, as AT&T (nyse: T - news - people )DuPont (nyse: DD - news - people ), State Street (nyse: STT - news - people ), Credit Suisse (nyse: CS - news - people ) and Viacom (nyse: VIA - news - people ) all announced plans to trim their respective workforces. Friday revealed additional evidence that the job market is worsening, as non-farm payrolls suffered their sharpest monthly decline in 34 years.  The Dow closed the week with a loss of 2.2%. The S&P 500 Index (SPX) finished the week with a 2.3% loss, and the Nasdaq Composite (COMP) shed 1.7% for the week.  The 850 area on the SPX has established itself as an important region of support following the break below the critical 160-month moving average in the first week of October. Why are we viewing 850 as significant?  First, this area marked the lower rail of the index's trading range during the final three weeks of October. Moreover, despite considerable movement around the 850 level since Oct. 10 (the date this support was first tested), the SPX has logged only six closes below this level during this time frame.  Friday, Oct. 10, was also the day that the CBOE Market Volatility Index (VIX) traded at its greatest premium to the SPX's 20-day historical volatility, since the break of the latter's 160-month trend line. It remains to be seen whether this premium is significant enough to mark a fear-based bottom.  So why is the market finding support amid dismal economic reports that could have been a catalyst to send the broad market plunging through these important areas? First, the action in the home building and financial sectors has been impressive after the government's announced $200-billion Term Asset-backed Securities Loan Facility and the $600 billion Government-Sponsored Entities Purchase Program. There were additional reports last week of plans to push mortgage rates down to 4.5%, which could help spur housing activity.  Additionally, it appears that short-term market players have grown pessimistic relative to the recent price action in the stock market, suggesting muted or short-duration declines on negative headlines and positive price action on news that offers a glimmer of hope.  An example of this short-term negativity is reflected in the International Securities Exchange data that we monitor. Through Tuesday of last week, the SPX had lost 0.23% during the previous 10 days. When the SPX's 10-day return ranges between 0.0% and -2.5%, the 10-day ISE all-equity call/put ratio averages 136 (implying 1.36 calls purchased to open for every put purchased to open on this exchange). Through Tuesday, this ratio was 1.16, significantly below the norm.  We have found that, during the past couple of years, when the 10-day SPX return falls between 0.0% and -2.5%, and the 10-day all-equity ISE call-put ratio comes in below 120--indicating more pessimism than usual--the SPX averages a 1.61% return in the following 10 days. However, when the 10-day all-equity ISE call/put ratio is 140 or higher at the same time the 10-day SPX return falls between 0.0% and -2.5%, the SPX averages a -2.09% return over the following 10 days.  So while the broad market finds itself trading just above major support as we enter the new trading week, there are potential headwinds. Specifically, the SPX's 900 century level resides slightly above the index's close on Friday, and its 50-day moving average is declining quickly. This trend line comes into the week sitting at 929.64, down from 964.57 the previous week. Moreover, the VIX comes into the week at 59.93, significantly below the SPX's 20-day historical volatility of 74.00. During the past few months, the market's best short-term rallies have occurred when the VIX is trading at a premium to the 20-day historical volatility of the SPX.  We continue to favor home building stocks, and select financial stocks, such as Wells Fargo (nyse: WFC - news - people ) and M&T Bank (nyse: MTB - news - people ). Continue to avoid the crowded energy, gold and technology sectors.  Here is a brief list of some of the key events for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective Web site for official reporting dates.  Tuesday: The economic calendar is sparse, with only October's pending homes sales on the docket. On the earnings front, AutoZone (nyse: AZO - news - people ), Kroger (nyse: KR - news - people ) and Pep Boys (nyse: PBY - news - people ) will step into the earnings confessional.  Wednesday: The calendar picks up today, with the release of October's wholesale inventories, the weekly crude-oil inventories and the November Treasury budget. In earnings news, CKE Restaurants (nyse: CKR - news - people ), FuelCell Energy (nasdaq: FCEL - news - people ) and Multimedia Games (nasdaq: MGAM - news - people ) will report their quarterly results.  Thursday: Thursday will see the release of import and export prices for November, initial jobless claims and the October trade balance. Stepping into the earnings limelight on Thursday are Ciena (nasdaq: CIEN - news - people ), Costco Wholesale (nasdaq: COST - news - people ), Krispy Kreme Doughnuts (nyse: KKD - news - people ) and lululemon athletica (nasdaq: LULU - news - people ).  Friday: The week concludes with the release of the producer price index, November retail sales, October business inventories and the preliminary University of Michigan consumer sentiment index for December. Only ADDvantage Technologies Group (amex: AEY - news - people ) and Duckwall-ALCO Stores (nasdaq: DUCK - news - people ) report earnings.  Click here for more ideas and recommendations, and to learn more about Bernie Schaeffer's Option Advisor.
Last week's stock rally on horrible employment news could be a good signal that we've found a bottom.