July was the best month for stocks in seven years, but Friday was barely positive with concern that a double dip in the economy in 2010 could put a halt to the rally. Many analysts think that consumer spending will have to improve since it makes up 2/3 of the economy.

The Commerce Department reported that Gross Domestic Product fell at an annual rate of 1% in Q2, but since that was smaller than expected it was greeted as a minor positive. But the department also revised Q1 to show a bigger decline than previously reported.

On Friday materials firms were the leading group. Newmont Mining rose 3.8% and Alcoa (AA) rose 2.6%. Disney (DIS) missed Q3 estimates and fell 4.2%, Las Vegas Sands (LVS) fell 16% after reporting its 6th loss in a row, and Dun & Bradstreet (DNB) missed estimates and fell 13%. McAfee (MFE) rose 4.8% as it beat analysts’ estimates and Beckman Coulter (BEC) exceeded estimates and jumped 11%.

At the close the Dow Jones Industrial Average was up 17 points to 9,172, the S&P 500 gained a point to 987, and Nasdaq fell 6 to 1,979. The NYSE traded 1.5 billion shares with advancers ahead by 8-to-5. On Nasdaq 732 million shares traded but decliners slightly outnumbered advancers.

For the week the DJIA gained 0.9%, the S&P 500 was up 0.8%, and Nasdaq rose 0.6%. For the month of July the Dow gained 8.6%, the S&P was up 7.4%, and Nasdaq gained 7.8%.

On Friday September Crude Oil rose $2.51 to $69.45 a barrel, and the Amex Energy SPDR (XLE) gained 49 cents to $50.62. Both Oil and Gold advanced on weakness in the dollar. August Gold rose $18.80 to $953.70 an ounce, and the PHLX Gold/Silver Index (XAU) jumped $5.65 to $148.62.

What the Markets Are Saying

The failure on Thursday of the two of the major averages, S&P 500 and Nasdaq, to successfully attack and hold above major objectives was not a good short-term sign. For the S&P the magic 1,000 number is crucial, but Nasdaq’s 2,000 is even more important since Naz has been the market leader since early July and did pop to an intraday high of 2009.81 but couldn’t hang on to it.

Nasdaq’s failure to hold triggered several negative short-term signals. Candlestick technicians say that a “Gravestone Doji” occurred – zounds, sounds pretty ominous! And the slow stochastic triggered a trading sell too. The candlestick folks say that this signal often results in a turning point, especially after a major move up.

I’m not ready to call a serious top to Nasdaq but I would point out that there is a trading gap that occurred from 1,970.65 to 1,977.65. If the gap is closed and an immediate rally occurs, the chances are good that the advance will continue. But if the gap is closed and the day ends lower, watch out since this would be interpreted as a reversal.

After such a strong performance by every major index it would not be unusual for the trend to consolidate with a modest pullback. For the Dow the first support is at 8,730 to 8,750 and for the S&P 500 the first zone of support is the prior breakout level at 945 to 950. But if the “500” falls under 930 watch out, because that sort of correction could negate the breakout and lead to something more serious than just a normal round of profit taking.

Nasdaq could find support at the bottom of the recent island which resulted in Thursday’s gap. That bottom was made on Friday, July 24, at 1,938, but a strong support zone begins at the former high of June 11 at 1,880 and extends down to another gap with a bottom at just over 1,800.

It is unlikely that stocks can duplicate the enormous gains of July, but the technical makeup of the advance does not warrant strong selling by either investors or traders. A consolidation is in order and with that investors should now sell any stocks that failed to advance in July and write options or take other defensive measures to protect gains. Traders should temporarily consider the short side for a very quick trade, but the long-term trend is up and so they must protect themselves with stop-loss orders. Again, buy on weakness since the bull is again in the box.

Today’s Trading Landscape

Earnings to be reported include: 3PAR, Albany Int’l Corp, Alphatec Holdings, Altra Holdings, Anadarko Petroleum Corp, Arena Pharmaceuticals, Argo Group Int’l Holdings Ltd, Atmel Corp, ATS Medical, Axis Capital Holdings Ltd, Banco Bradesco S.A., Bancolombia S.A., Barclays PLC, Barnes Group, Brookdale Senior Living, Bryn Mawr Bank, Carmike Cinemas, Carrols Restaurant Group, Centex Corp, Chesapeake Energy Corp, Clean Harbors, Clorox, CNA Financial Corp, CompX Int’l, Comstock Resources, Concho Resources, Corporate Executive Board Co, Cutera, DexCom, Ducommun, Duff & Phelps Corp, Duoyuan Global Water, Entercom Communications, Everest Re Group Ltd, Extra Space Storage, EZchip Semiconductor Ltd, First Financial Bancorp Ohio, First Mercury Financial Corp, FirstEnergy, Flagstone Reinsurance Holdings Ltd, Forest Oil Corp, Gladstone Capital Corp, Grand Canyon Education, Haemonetics Corp, Herbalife Ltd, HFF, Hologic, HSBC Finance Corp, HSBC Holdings plc, Humana, Information Services Group, Innophos, Integral Systems, James River Coal Co, John Bean Technologies Corp, LeapFrog Enterprises, Liquidity Services, Loews Corp, Lydall, Magellan Midstream Partners L.P., MannKind, Marathon Oil Corp, Maui Land & Pineapple, MDU Resources, Meadowbrook Insurance, MedAssets, Mercury General, MGM Mirage, Molson Coors Brewing Co, Mueller Water Products, Nam Tai Electronics, National Retail Properties, NuStar Energy LP, One Liberty Properties, Orbotech, Parkway Properties, Peapack-Gladstone Financial Corp, PharMerica Corp, PMA Capital Corp, Portland General Electric Co, Post Properties, ProAssurance Corp, Pulte Homes, Regal-Beloit Corp, Resource Capital Corp, Rogers Corp, Rolta India Ltd, RRSAT Global Communications Network Ltd, Rubios Restaurants, Santarus, Senorx, Smith Micro Software, St. Mary Land & Exploration, STEC, Sun Hydraulics, Sykes Enterprises, Tasty Baking Co, Technitrol, Texas Roadhouse, The GEO Group, The Principal Financial Group, TIM Participacoes S.A., Tyson Foods, Ultra Clean Holdings, Ultra Petroleum Corp, Union Drilling, UniSource Energy, United Western Bancorp, Uroplasty, Vulcan Materials, Williams Controls, WMS Industries, Wonder Auto Technology, Wright Medical Group, and ZymoGenetics.

Economic reports due: Motor Vehicle Sales, ISM Manufacturing Index (the consensus expects 46.5) and Construction Spending (the consensus expects -0.5%).

Late News: Humana (HUM) Q2 $1.67 vs. $1.65-$1.70 est. Ford (F) is expected to report the first monthly sales increase in over 2 years.

Get Sam Collins’ Daily Trader’s Alert e-mailed to you each morning before the opening bell absolutely FREE!

In addition to getting instant access to his Daily Market Outlook, you’ll also receive his Trade of the Day in the same e-mail so you can start your day off right by positioning yourself for profits!

Sign up today for Sam’s FREE Daily Trader’s Alert today!

Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of his most recent market outlooks.