Daily State Of The Markets: All Eyes Remain On Oil

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Includes: DIA, IWM, QQQ, SPY, USO
by: David Moenning

The focal points in the market remain largely the same on this fine Wednesday morning. Oil continues to be the big topic of discussion with both the EIA and OPEC reducing their demand forecasts today. In addition, Iran says that oil could fall to $40 or below as price wars take hold among OPEC members. All of the above has crude futures falling again today after Tuesday's brief reprieve. Stocks rebounded in China on the back of weaker than expected inflation data, which fueled hopes for rate cuts from the PBoC. In Europe, the uncertainty surrounding the political situation in Greece remains as Samaras does not appear to have the votes needed to form a government quickly. Here at home, Congress reached a deal to avoid a government shutdown and traders continue to fret over the upcoming Fed meeting. U.S. stock futures appear to be following crude oil this morning and currently point to a weaker open on Wall Street.

Current Market Environment

There is but one word needed to sum up Tuesday's market action: Wow. When I flipped on my office lights at 5:13 am and the screens began to stream news and flash quotes from around the world, things didn't look so hot. China's Shanghai Composite was down 5.4%, European bourses were diving, Greece was back in the news, and traders were fretting about the Fed. Stocks remained overbought after an historic joyride to the upside. And traders appeared to have little reason to do any buying here. And with the U.S. futures sporting a bright shade of red, it looked like the day was going to be u-g-l-y. And in the early going, it was as the Dow was off more than 220 points in the first hour. However, a bounce in oil, some more talk about QE from across the pond, and some dip-buying/short-covering turned things around. And before long the smallcaps turned green. Then the microcaps, Then the NASDAQ 100. Then the midcaps. And at the end of the day, the big, bad down day had been all but erased. As such, we must conclude that buyers remain alive and well, and that the bulls should continue to be given the benefit of the doubt.

Looking At The Charts

For a while there on Tuesday, the short-term trend had turned decidedly negative. Short-term support had been broken and the S&P 500 was flirting with the 2040 level, which as we had mentioned yesterday, was a very important support zone. As the day wore on and the rebound took hold, the thought was that the day's down draft had expanded the recent tight trading range and stopped where it needed to. But by the end of the day, the S&P had managed to move back above the 2050 level, which meant that the old range had not actually been violated on a closing basis. It is also worth noting that the action over the last couple weeks has managed to work off a fair amount of the short-term overbought condition. So, while the trading range may or may not have been expanded, the intermediate-term trend remains positive at this time.

S&P 500 - Daily

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

Japan: -2.25%

Hong Kong: +0.17%

Shanghai: +2.93%

London: +0.16%

Germany: +0.72%

France: +0.42%

Italy: +0.39%

Spain: +0.52%

Crude Oil Futures: -$1.20 to $62.62

Gold: -$4.10 at $1227.90

Dollar: lower against the yen and pound, higher vs. euro

10-Year Bond Yield: Currently trading at 2.219%

Stock Indices in U.S. (relative to fair value):

S&P 500: -6.78

Dow Jones Industrial Average: -52

NASDAQ Composite: -9.82

Thought For The Day:

It is impossible to speak in such a way that you cannot be misunderstood. -Karl Popper

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of Fed/ECB/BOJ Policy

2. The State of the Oil Crash

3. The State of the U.S. Economy

4. The State of China's Economy

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Neutral

(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Positive

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Positive

(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 2050
  • Key Near-Term Resistance Zone(s): 2075

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Negative
  • Price Thrust Indicator: Positive
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Positive
  • Technical Health of 100 Industry Groups: Positive

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • S&P 500 Overbought/Oversold Conditions:

    - Short-Term: Neutral

    - Intermediate-Term: Moderately Overbought

  • Market Sentiment: Our primary sentiment model is Neutral.

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

  • Weekly Market Environment Model Reading: Positive