With the intraday volatility continuing unabated, it appears that it's decision time in the markets. And the decisions made in the near-term by the Fed, the Chinese, and the price action itself will go a long way in answering the big-picture question of whether the current dance to the downside winds up being a correction within the context of an ongoing bull market or something more grizzly in nature.

Let's start with the price action of the S&P 500. For me at least, the big question is whether we are currently seeing the beginning of the bottoming phase (which during waterfall declines occurs after the dive, the bounce, and the retest phases) or a continuation of the first leg lower. As such, the converging short-term trendlines drawn in on the chart below represent the key levels to watch.

S&P 500 - Daily

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While the proliferation of charting software has made technical analysis available to just about everyone and the advent of high-speed algo trading has caused chart watching to lose much of its value, technical levels still matter at times. And I will argue that although the exact price levels aren't critical, the current resistance zone at SPX 1990(ish) and support at 1900 and 1867 will continue to be important - yes, even to the trading machines.

A similar situation can be seen when looking at a longer-term, weekly chart of the S&P.

S&P 500 - Weekly

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Although the current trend of the market from an intermediate-term perspective (3 weeks to 6 months) is clearly down, the bulls will argue that their counterparts have not produced a "lower low" on the closing weekly chart. And by definition, this means that at least some kind of a longer-term uptrend remains intact.

The key here is that without a "lower low" it is very hard to argue that the bears have mustered up anything meaningful at this stage.

Other Decisions on the Line

Unless you live in a cave, you are likely aware that the Federal Reserve will be meeting next week to decide whether or not to announce the "liftoff" from ZIRP (zero interest rate policy). Most everyone agrees that Janet Yellen's bunch does indeed need to move off of the zero bound. The question is when the initial liftoff will occur.

Part of the reason for yesterday's reversal lower can be attributed to the government's JOLTS report, which showed that the labor market continues to improve. And when you combine this with the August Jobs Report, one can easily argue that one of the Fed's two primary mandates (price stability and full employment) has been achieved and that there is no longer any justification for the Fed to keep rates at zero.

However, it is clear that the Bernanke/Yellen Feds have preferred to err on the side of caution, not wanting to risk another significant economic pullback when they are clearly low on ammunition. And given the current turmoil in the markets courtesy of the Chinese, some FOMC members may choose to remain "friendly" to the markets for a while longer - just to be safe.

Of course, erring on the side of caution could take many forms at this stage. For example, Yellen could announce an initial hike of 0.25% in the Fed Funds Rate and then say that they will be on hold until things calm the heck down. Or the FOMC could stand pat and not hike rates next week. Or...

Frankly, a rate hike at this stage would be the most publicly broadcasted move in Fed history. And as such, it ought to be priced into the stock market from an intermediate-term perspective. But with the trading machines clearly in control of the market in the near-term, it is a coin flip as to what the algos will decide to do next week after the FOMC announcement.

Speaking of the Chinese

And then there is China. Stock markets in mainland China fell overnight in response to Premier Li's statements at the World Economic Forum's Summer Davos meeting in Dalian, in which he said the government had sufficient capacity to respond should growth fall below reasonable levels.

While this sounds like an accommodative statement, part of Tuesday's joyride to the upside was attributed to expectations that the Chinese would take stimulative measures sooner rather than later. As such, Li's comments overnight served to dampen expectations, which wound up disappointing traders.

So, the other major decision traders are watching for an answer to here is when the Chinese will take action to stimulate economic growth and how big the move(s) will be.

The bottom line would appear to be that until some of these big decisions are taken, the market will likely remain volatile and 400-500 point intraday swings on the Dow should probably be expected to continue.

Turning To This Morning

As mentioned above, the statements from China's Premier at the World Economic Forum clearly disappointed traders. In short, Premier Li said that the country can still meet its major economic targets this year, which put a damper on the idea that more stimulus would be forthcoming. In addition, a Hilsenrath article out yesterday afternoon is serving to create additional uncertainty surrounding the expectations for next week's Fed meeting. And this just in, influential hedge fund manager David Tepper is telling CNBC that earnings expectations are too high, that "flat" is not a bad place to be right now," and that he can't call himself a bull at this stage. In response, the global markets are all sporting various shades of red this morning and U.S. futures have followed suit by moving from green to red overnight.

This Morning's Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -2.51%
    Hong Kong: -2.57%
    Shanghai: -1.39%
    London: -1.08%
    Germany: -0.91%
    France: -1.13%
    Italy: -1.11%
    Spain: -1.63%

Crude Oil Futures: +$0.09 to $44.24

Gold: +$4.50 at $1106.50

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

10-Year Bond Yield: Currently trading at 2.213%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -8.69
    Dow Jones Industrial Average: -66
    NASDAQ Composite: -17.40

Thought For The Day:

A good leader takes a little more than his share of the blame, a little less than his share of the credit. - Arnold Glasow

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 China's Currency/Economy
      2. The State of Fed Fed Policy
      3. The State of the U.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 6 months, and long-term as 6 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: Negative
(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Neutral
(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: 1870
• Key Near-Term Resistance Zone(s): 1995

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): Neutral
• Price Thrust Indicator: Negative
• Volume Thrust Indicator: Negative
• Breadth Thrust Indicator (NASDAQ): Neutral
• Intermediate-Term Bull/Bear Volume Relationship: Negative
• Technical Health of 100+ Industry Groups: Moderately Negative

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: Oversold
        - Intermediate-Term: Oversold
• Market Sentiment: Our primary sentiment model is Positive .

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: Negative

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

David D. Moenning
Founder and Chief Investment Strategist
Heritage Capital Research

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.