The early action on this fine Monday morning suggests that traders are still taking their cues from any/all headlines relating to Ebola. U.S. futures had been steady for much of the morning until a headline saying that a pediatric patient is evaluated crossed the wires. Almost instantly, futures doubled their losses on the news. And while the decline is not significant at this point, this reminds us that the algos are primed and ready to react to this story.

The big financial news today is the weekend report from the ECB stating that 25 of the 130 largest European banks failed the latest round of stress tests and will need to raise €24.6 billion in new capital. However, the bank notes that no major banks failed the stress tests and that more than €15 billion in new capital has already been raised.

Also in Europe, the latest German IFO Business Climate Index came in below expectations, falling for a sixth consecutive month.

In Brazil, the stock market is down more than -5% on news that incumbent president Dilma Rousseff defeated pro-business candidate Aécio Neves in Sunday’s runoff election.

And sticking with the global theme, there is a fair amount of chatter this morning about the Goldman report in which the firm reduced their forecast for oil demand. As such, traders will likely continue to watch the all-important $80 line in the sand for crude today.

Looking ahead, investors should remember that the FOMC begins its two-day meeting on Tuesday and is expected to announce the end of QEIII at the conclusion Wednesday afternoon. Note that there is no press conference scheduled for this meeting.

Here at home, investors will get a look at the Flash PMI at 9:45 am eastern and Pending Home Sales at 10:00 am. U.S. futures are now pointing to a lower open on Wall Street.

Current Market Environment

The question of the day would appear to be: Now what? Stocks experienced the largest pullback in a couple years during the mid-September through mid-October period as fears about the state of the global economy caused investors to rethink the latest new highs. However, in the 7 sessions since October 15, the S&P has recovered almost 70% of the decline and now sits just 2.4% from the all-time high. So, with serious resistance overhead, it will be interesting to see if the bulls can keep movin' on up. Our market models have improved on the spirited bounce but remain neutral on balance at this time.

Looking At The Charts

The key to the near-term technical picture is the overhead resistance awaiting the major indices. For the S&500, the next 50 points may proved significantly more difficult to get through than the last 50. The bears are also quick to point out that there is a fairly large gap still open on the chart of the S&P down at 1905. And should our furry friends get something going to the downside, this area is likely to become a magnet. But for now, the short-term trend is up.

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: +0.64%
    Hong Kong: -0.68%
    Shanghai: -0.53%
    London: -0.09%
    Germany: -0.57%
    France: -0.36%
    Italy: -1.69%
    Spain: -1.04%

Crude Oil Futures: -$0.70 to $80.31

Gold: -$1.10 at $1230.70

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

10-Year Bond Yield: Currently trading at 2.263%

Stock Indices in U.S. (relative to fair value):
    S&P 500: -7.88
    Dow Jones Industrial Average: -60
    NASDAQ Composite: -10.44

Thought For The Day:

Worry often gives a small thing a great shadow. -Swedish Proverb

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 Ebola Outbreak

      2. The State of Fed/ECB Policy
      3. The Outlook for Global Growth
      4. The Outlook for 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 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Positive
(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: 1905
• Key Near-Term Resistance Zone(s): 1965-1980

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): Positive
• Price Thrust Indicator: Neutral
• Volume Thrust Indicator: Neutral
• Breadth Thrust Indicator: Positive
• 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 Overbought
        - 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: Moderately 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.