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Traders Eyeing the Line in the Sand image

Although the intraday direction in the stock market is driven largely by algorithmic trading these days and can change at the drop of a hat (which is actually an eternity when measured in milliseconds), the recent price action would seem to suggest that the worries in the market are becoming more predominant.

The primary sources of worry at this time include the impact of the rising dollar on earnings, the crash in oil, the dive in bond yields (do bonds know something stocks don't?), Europe's economy, Greece, China, and finally the U.S. economic data here at home.

This morning, traders have received additional inputs on a couple of these fronts. First off, China's official PMI sank below the all-important 50-level, which means the manufacturing sector in the world's second biggest economy is now officially in contraction mode. Stocks in Shanghai suffered as a result, dropping by -2.57% overnight - and there are already more calls on Chinese officials for additional stimulus.

In Europe, the PMI releases were less harsh, with the Eurozone Manufacturing PMI actually inching up on a monthly basis. However, the message from the results was that the economies of the EU continue to stagnate. The good news from across the pond is that new Greek PM Tsipras appeared to a bit more conciliatory over the weekend, saying that Greece will repay its debts and reach out to creditors. As such, the worry over a potential "Grexit" have been moved to the back burner this morning.

There is also a wee bit less worry on the oil front today. Crude futures are continuing to move higher again this morning, after surging up 8% on Friday afternoon. While the move is viewed largely as short-covering, it should be noted that this is the first real attempt at stabilization in the commodities space in over four months. As such, there is some hope (albeit slim at this stage) that the crash in oil is ending.

So, with nothing new to really worry about so far this morning and prices of the major blue chip indices here in the U.S. sitting right at important lines in the sand, it appears that stock prices will open slightly higher at the open on Wall Street today. However, we note that if the S&P 500 were to move lower by about 25 points, there is little doubt that technical selling could take over. As such a bounce would be logical at this stage.

Current Market Environment

While many of Wall Street's old-time technical rules are more art than science, one of the oldest adages in the book is that when volatility rises to a meaningful degree, the major trend is about to change. And to be sure, volatility has increased thus far in 2015. So, with the Dow and S&P 500 perched right at several important lines in the sand, the bears can be heard reminding anyone and everyone of this ago-old adage. However, we prefer to listen to the message from our disciplined market models, which remain neutral at this stage and suggest that some caution may be warranted.

Technical Take

The key takeaway from the charts of the Dow and S&P right now is that the bears on the brink of what could be an important move and the bulls have their backs up against the wall. In short, everyone under the sun sees where the 150-day moving average on the S&P 500 is. Everyone also sees that the blue chip indices are flirting with important near-term support and that that both the December lows as well as the 200-day moving averages are just below current levels. So, the bottom line is that the near-term price action could be very important.

S&P 500 - Daily

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Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -0.66%
    Hong Kong: -0.09%
    Shanghai: -2.57%
    London: +0.02%
    Germany: +0.41%
    France: -0.07%
    Italy: -0.50%
    Spain: -1.88%

Crude Oil Futures: +$0.46 to $48.72

Gold: -$6.70 at $1272.50

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

10-Year Bond Yield: Currently trading at 1.672%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +3.92
    Dow Jones Industrial Average: +41
    NASDAQ Composite: +5.92

Thought For The Day:

"The way I see it, if you want the rainbow, you gotta put up with the rain!" -Dolly Parton

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 the U.S. Economy
      2. The State of the Earnings Season
      3. The State of Fed/ECB Policy
      4. The State of the Oil Crash
      5. The State of the Greece Banking System

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

Intermediate-Term Trend: Moderately 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: 1995-75
  • Key Near-Term Resistance Zone(s): 2060

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: Neutral
  • Volume Thrust Indicator: Neutral
  • Breadth Thrust Indicator: Neutral
  • Bull/Bear Volume Relationship: Neutral
  • Technical Health of 100 Industry Groups: Neutral

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: Moderately Oversold
          - Intermediate-Term: Moderately Oversold
  • 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

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research - A CONCERT Advisor
Be Sure To Check Out the NEW Website!


Indicator Explanations

Trend and Breadth Confirmation Indicator (Short-Term) Explained: History shows the most reliable market moves tend to occur when the breadth indices are in gear with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. From 1998, when the A/D line is above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +32.5% per year. When one of the indicators is above its smoothing, the equity index has gained at a rate of +13.3% per year. And when both are below, the equity index has lost +23.6% per year.

Price Thrust Indicator Explained: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average. When the Value Line's 3-day rate of change have moved above 0.5 standard deviation of the 30-day average ROC, a "thrust" occurs and since 2000, the Value Line Composite has gained ground at a rate of +20.6% per year. When the indicator is below 0.5 standard deviation of the 30-day, the Value Line has lost ground at a rate of -10.0% per year. And when neutral, the Value Line has gained at a rate of +5.9% per year.

Volume Thrust Indicator Explained: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume (i.e., the total volume traded in stocks which rose in price each day) to the 10-day total of daily declining volume (volume traded in stocks which fell each day). This ratio indicates when advancing stocks are attracting the majority of the volume (readings above 1.0) and when declining stocks are seeing the heaviest trading (readings below 1.0). This indicator thus supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions. When in a positive mode, the NASDAQ Composite has gained at a rate of +38.3% per year, When neutral, the NASDAQ has gained at a rate of +13.3% per year. And when negative, the NASDAQ has lost at a rate of -8.5% per year.

Breadth Thrust Indicator Explained: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. As expected, the NASDAQ Composite performs much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust. In positive mode, the NASDAQ has gained at a rate of +22.1% per year since 1981. In a neutral mode, the NASDAQ has gained at a rate of +14.5% per year. And when in a negative mode, the NASDAQ has lost at a rate of -6.4% per year.

Bull/Bear Volume Relationship Explained: This indicator plots both "supply" and "demand" volume lines. When the Demand Volume line is above the Supply Volume line, the indicator is bullish. From 1981, the stock market has gained at an average annual rate of +11.7% per year when in a bullish mode. When the Demand Volume line is below the Supply Volume line, the indicator is bearish. When the indicator has been bearish, the market has lost ground at a rate of -6.1% per year.

Technical Health of 100 Industry Groups Explained: Designed to provide a reading on the technical health of the overall market, this indicator takes the technical temperature of more than 100 industry sectors each week. Looking back to early 1980, when the model is rated as "positive," the S&P has averaged returns in excess of 23% per year. When the model carries a "neutral" reading, the S&P has returned over 11% per year. But when the model is rated "negative," stocks fall by more than -13% a year on average.

Weekly State of the Market Model Reading Explained:Different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Market Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning, an advisor representative of CONCERT Wealth Management Inc. (CONCERT), is founder of Heritage Capital Advisors LLC, a legal business entity doing business as Heritage Capital Research (Heritage). Advisory services are offered through CONCERT Wealth Management, Inc., a registered investment advisor. For a complete description of investment risks, fees and services review the CONCERT firm brochure (ADV Part 2) which is available from your Investment Representative or by contacting Heritage or CONCERT.

Mr. Moenning is also the owner of Heritage Capital Management (HCM) a state-registered investment adviser. HCM also serves as a sub-advisor to other investment advisory firms. Neither HCM, Heritage, or CONCERT is registered as a broker-dealer.

Employees and affiliates of Heritage and HCM may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Editors will indicate whether they or Heritage/HCM has a position in stocks or other securities mentioned in any publication. The disclosures will be accurate as of the time of publication and may change thereafter without notice.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.