For much of Monday, the S&P 500 traded in a relatively narrow range with the market appearing to be searching for direction. After a decline of more than 5% over the past few weeks, most traders were looking for a bounce. After all, every single time the market had "dipped" over the past three years, buyers had emerged and before long, the market had always wound up bounding to new all-time highs.

However, this time appears to be a bit different. And while stocks are indeed oversold and due for a reflex bounce, it is important to recognize that there are things happening in this pullback that were not present during all those dip-buying opportunities seen since the middle of of 2011.

The venerable index fell more than 30 points in the last 90 minutes of trading yesterday. There was no obvious catalyst to the latest swoon, save word that another case of Ebola had cropped up in Dallas. However, there was a technical event taking place late yesterday that had not happened during the prior dips - and it did seem to attract a lot of attention.

In short, the S&P 500 wound up decisively breaking below its still upwardly sloping 200-day moving average. And while history shows that such an event is actually a good sign for stocks in the ensuing weeks, there are an awful lot of folks that view the 200-day as the dividing line between a good and bad market. As such, there were undoubtedly a fair number of sell algos primed and ready when the break occurred.

S&P 500 - Daily

View Larger Image

Time to Bail?

For those who may be inclined to bail out of any and all equity positions based on the violation of the 200-day, you may want to continue reading.

First of all, the key to a break of the 200-day being a good "timing signal" lies in the direction the moving average itself is heading at the time of the break. You see, when the 200-day is moving higher, brief breaks to the downside actually represent pretty good entry points.

However, if the 200-day is itself sloping downward when the S&P breaks below, well, it's a different story. The bottom line is THIS is when you want to think about getting out of Dodge, if you haven't done so already.

Bears Beware: Not a Great Timing Signal in Near-Term

Regardless of which direction the 200-day is moving at the time of the crossing, history shows that such an event tends to signal an oversold market and is actually a decent buying opportunity in the near-term.

In looking at the broad market, stocks have actually moved higher in the 4 weeks after a downward crossing of the 200-day moving average at a rate that is nearly 3 times higher than normal. And then over the next quarter, the market has outperformed the average 3-month return by more than double.

Something More Meaningful?

So, in the short-term, it appears that stocks are oversold and due for a bounce. And the history associated with a break of the 200-day would seem to suggest that the bounce could begin soon. However, the key question is if that move will represent a bottom to the corrective phase or simply a bounce within a more meaningful decline?

This question is represented in the weekly chart of the S&P 500 shown below.

S&P 500 - Weekly

View Larger Image

The red circles on the chart represent the dip-buying opportunities since the mini-bear of 2011 that was associated with the ongoing Europe debt crisis and the downgrade of U.S. debt. The black circles represent the two meaningful corrections that occurred after the credit crisis bear market ended in March 2009.

So, the question is whether or not the current decline will be a red circle or a black circle?

In looking at the charts of the other major indices for clues, the Russell 2000 continues to stick out like a sore thumb.

Russell - Weekly

View Larger Image

To be sure, technical analysis is definitely more art than science and is a little like reading tea leaves at times. However, the message from the chart of the Russell 2000 is fairly clear as the current corrective phase is very different from the dips seen in the prior two years.

The Bottom Line

The current market environment continues to weaken. And while it can be argued that a fair amount of the recent carnage may have been a bit artificial and/or overdone, there is little denying the fact that this decline is different from what traders have become accustomed to over the past couple of years. Therefore, investors need to play the game accordingly.

In our shop, our market indicators have had us managing risk pretty hard over the past few weeks and cash levels are currently quite elevated. And should the current bounce prove weak, the overall environment could easily move into the negative zone, which would cause a shift in strategy to a decisively more defensive approach. But for now, it is time to watch the bounce and see how it plays out.

Turning To This Morning

While it has been a back-and-forth pre-market session, it now appears that traders have finally made up their minds to put aside worries of Ebola, the end of QE, the glut of oil, as well as the lousy economic situation seen across the pond and focus on some earnings reports. Although the Eurozone and German ZEW Economic Indices performed another face plant last month and Asian markets struggled, earnings from JPMorgan, Citi, and the like have improved the mood in the early going. U.S. stock futures now point to a stronger open on Wall Street.

Pre-Game Indicators

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

Major Foreign Markets:
    Japan: -2.38%
    Hong Kong: -0.41%
    Shanghai: -0.30%
    London: +0.18%
    Germany: +0.10%
    France: -0.21%
    Italy: -0.61%
    Spain: -0.23%

Crude Oil Futures: -$0.65 to $85.09

Gold: +$5.10 at $1235.10

Dollar: higher against the yen, euro and pound.

10-Year Bond Yield: Currently trading at 2.209%

Stock Indices in U.S. (relative to fair value):
    S&P 500: +9.11
    Dow Jones Industrial Average: 63
    NASDAQ Composite: +26.45

Thought For The Day:

Do what you can, with what you have, where you are. -Theodore Roosevelt

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 Outlook for Global Growth
      2. The Price Action in the Major Stock Market Indices
      3. The State of Fed/ECB Policy
      4. The Outlook for U.S. Economy
      5. The Outlook for U.S. Earnings

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: 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: ModeratelyPositive
(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: 1875
• Key Near-Term Resistance Zone(s): 1905ish

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
Indicator Explained

Price Thrust Indicator: Negative
Indicator Explained

Volume Thrust Indicator: Negative
Indicator Explained

Breadth Thrust Indicator: Negative
Indicator Explained

Bull/Bear Volume Relationship: Moderately Negative
Indicator Explained

Technical Health of 100 Industry Groups: Neutral
Indicator Explained

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: Moderately 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 State of the Market Model Reading: Neutral
Indicator Explained

Looking For Guidance in the Markets?

The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.

The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.

The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.

All StateoftheMarkets.com Premium Services include a 30-day money-back guarantee!

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

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com
President, Heritage Capital Research
Check Out the NEW Website!

Positions in stocks mentioned: none

For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)

Free Research From StateoftheMarkets.com:

Remember, you can receive email alerts for more than 20 free research report alerts from StateoftheMarkets.com including:

• State's Chart of the Day - Eeach day we highlight a top rated stock with a positive technical setup
• The Risk Manager Report - Stay in tune with the market's risk/reward environment
• The “10.0” Report - These are the REAL best-of-breed companies
• The Insiders Report - See what the people who know their company's best are buying
• ETF Leaders Report - Looking for the top performing ETF's? You've come to the right place.
• The SOTM 100 Portfolio - The top rated stocks in each market sector
• State's Market Models - Each week we quantify the "state of the market" with a series of models
• The Focus List - Think of the focus list as your own private research department. We do all the work and highlight our top picks each trading day

Our Mission Statement:

At StateoftheMarkets.com, our goal is to provide everything you need to be a more successful investor: The must-read headlines, market commentary, market research, stock analysis, proprietary risk management models, and most importantly – actionable portfolios with live trade alerts.

Finally, we are here to help - so don't hesitate to call with questions, comments, or ideas at 1-877-440-9464.

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 and on our website is for informational purposes only. No part of the material presented in this report or on our websites 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. The opinions and forecasts expressed are those of the editors of StateoftheMarkets.com and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.