After the relatively wild action seen late last week, the question of the day is if the swings we saw on Thursday and Friday are meaningful - or - simply the work of the trend-following bots doing their thing.

Recall that on Thursday, the S&P 500 fell 23.45 points or -1.2 percent on a plethora of headache-inducing headlines. First it was new sanctions on Russia for the handling of the situation in Ukraine. Next, it was flight MH17 being shot down over Ukraine. Then the Fed's James Bullard chimed in about the Fed needing to raise rates sooner than expected. After that, we heard that Israel had initiated a ground offensive in Gaza and that the White House was on lockdown. And finally, there was the report that the largest insider trading probe in history had begun, and involved no fewer than 44 hedge funds.

Through most of the day on Thursday, it is important to note that the market held up pretty darned well. The thinking seemed to be that the downing of another Malaysian airliner was likely not an act of war and that the various skirmishes in Gaza rarely affect the markets. However in the last hour, traders and their computers took the market back to the lows of the day, snapping a bunch of technical levels in the process.

Then on Friday it became clear that although MH17 was indeed shot down by a sophisticated Russian-built BUK surface-to-air missile, it was not the work of either the Russian or Ukranian governments. So, given that WWIII was not on the line, the dip buyers returned. As the momentum began to build to the upside, the trend-following bots jumped on board in earnest at three different points during the day. And before you knew it, the S&P had regained 20 of the 23 points lost on Thursday and the word in the press was that traders were "relieved."

However, as was mentioned in Friday's missive, this appears to be more a case of trend-following bots doing their thing than investors making adjustments to their portfolios based on fundamentals.

But Do The Levels Matter?

There is an old saying on Wall Street that may be appropriate here. "It's not a breakout if you are the one breaking it out."

In other words, a trader shouldn't base their view of the market action on something that they themselves were responsible for. And in short, this seems to be exactly what is happening in today's market and a great way to sum up the dilemma facing traders this week.

Today, the question is this: Given that the trend-following bots continue to move prices intraday in one direction until they don't, do the key price levels really matter?

Bulls Point to the Charts

S&P 500 Daily

One of the bullish arguments at the present time is that through all of the bad news and geopolitical tensions, the S&P has held above important near-term support and that the uptrend line that has been intact now since mid-April, has not been violated.

Most technicians would likely agree that the chart of the S&P 500 remains in pretty good shape. As such, one could argue that the bulls should be given the benefit of any doubt. But...

iShares Russell 2000 Smallcap ETF (IWM) Daily

The chart of the Russell 2000 ETF tells a completely different story. In short, the chart of the IWM is not a pretty picture. From a short-term perspective, a downtrend is evident. And from a long-term perspective, one can argue that a double-top is in place.

The bottom line is that (1) the charts of the S&P and Russell 2000 represents a clear case of technical divergence and (2) it is unclear if the trend-following bots care about the important technical levels that traders tend to key on.

Therefore, it is probably a good idea to continue to watch the action closely.

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Turning To This Morning...

The focus this morning continues to be on Russia. However, at this stage, the focus is on the fact that Russia appears to be blocking access to the MH17 crash site. Since outsiders are being blocked by soldiers with machine guns, it makes an independent investigation nearly impossible. Therefore, the West is threatening further sanctions starting as soon as tomorrow if the situation is not rectified. In response, Russian stocks continued to move lower, Europe's bourses sport moderate losses, and U.S. stock futures point to a lower open.

Pre-Game Indicators

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

Major Foreign Markets:
- Japan: closed
- Hong Kong: -0.29%
- Shanghai: +0.25%
- London: -0.37%
- Germany: -0.85%
- France: -0.42%
- Italy: -1.05%
- Spain: -0.40%

Crude Oil Futures: +$0.11 to $103.24

Gold: +$8.20 at $1317.60

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

10-Year Bond Yield: Currently trading at 2.490%

Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -4.97
- Dow Jones Industrial Average: -39
- NASDAQ Composite: -5.64

Thought For The Day...

Win or lose you will never regret working hard, making sacrifices, being disciplined or focusing too much. -John Smith

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 Geopolitical 'Issues'
      2. The State of Fed/ECB Policy
      3. The State of the Earnings Season
      4. The Outlook for U.S. Economic Growth

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 12 months)

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: 1955(ish)
• Key Near-Term Resistance Zone(s): 1985

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: Negative
• Price Thrust Indicator: Negative
• Volume Thrust Indicator: Negative
• Breadth Thrust Indicator: Neutral
• Bull/Bear Volume Relationship: Neutral
• Technical Health of 100 Industry Groups: Moderately 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 Condition:
  - Short-Term: Low Neutral
  - Intermediate-Term: Moderately Overbought
• Market Sentiment: Our primary sentiment model is Negative .

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 because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets 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.

Weekly State of the Market Model Reading: Moderately Positive

If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.

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

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

Positions in stocks mentioned: none

Forget the fast money and the latest, greatest option trade. What investors 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 Can Help

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

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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.