It seems hard to believe that three months have passed since Alcoa kicked off the fourth-quarter earnings season.  On January 6, the traditional launch of earnings season got under way with Alcoa disappointing the street.

Take a look at the chart of the S&P 500.  The blue arrow notes January 6, when Alcoa announced after the close.  Notice that the S&P had rallied from the 750 level, back up to the 950 level.

You also may have noticed that the S&P has now rallied from the 667 level up to the 840 level.  The rally from the November lows to the January high was for approximately 26 percent.  The rally from the March low up to now is for approximately 25 percent.

The similarities could be a bad sign for this rally continuing, but the one thing I have always said about earnings is that expectations are the only thing that matters.  Right now, expectations are extremely low for this quarter’s earnings season.

So the question on everyone’s mind is whether earnings will derail the rally or will it perpetuate it.  No one knows for sure of course, but I want you to look at the three charts below.  The first one is the monthly, the second one weekly and the last one is the daily.

The monthly overbought/oversold indicators aren’t even out of oversold territory yet, even after the 25 percent rally.  The weekly overbought/oversold indicators are almost dead in the middle of the range.  The daily indicators are close to being overbought.

So it is a mixed bag when we look at these indicators.  Personally, I think it would healthy for the market to move sideways for a few months so the monthly moving averages can catch up to where we are now.  I have mentioned the six and 12-month moving averages and watching for a crossover, but it would take another 25 percent from here for the S&P to get up to its 12-month moving average.

A little consolidation could go a long way in helping this market for the long run.  Should we see a mix of better than expected earnings and worse than expected earnings over the next four or five weeks, this could provide the consolidation that we need.

Good luck and good trading,Rick