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Key Levels for the S&P

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If the S&P closes above 1650, we will retest yearly highs.

Equities suffered an extremely choppy day on Tuesday, as the rally in the Japanese yen caused late selling. I still feel that this a "buy the dip" market, but there are reasons to be cautious.

The S&P stalled on Tuesday against resistance at the 1639 to 1642 level, which coincidentally was a lower high in the session compared to the reopen overnight. With a rally that failed at 1639.75, many of the indexes touched the unchanged level before running out of gas. The breakdown late into the close didn't lead to a new low, but solid data out of Europe on Wednesday morning has helped keep the S&P in a range.

(Read More: Futures Climb After S&P 500 Slumps 1%)

The market is now back above the major momentum pivot of 1631 to 1633. MSCI cut Greece from developed nation to emerging market status, but the market has shrugged this off, and may still be concentrating on the positive news on the US credit status that came out Tuesday but failed to attract many headlines. The fact is that S&P upgrading the U.S. sovereign debt rating to "stable" from "negative" should be more positive for the market than many have made it out to be.

(Read More: From Developed Back to Emerging: Greece's Full Circle)

Look for a pullback just below 1631 to serve as an early buying opportunity. Bears can use a test of 1642 as a quick selling opportunity but should not fight momentum. A close above here will be very positive, but a close back above 1649 to 1651.50 will be immediately bullish.

Interest rates have been a major topic of discussion, as Treasury notes have plummeted, which is generally bullish for equities. However, a quick rise in yields will cause equities to remain in check. For that reason, traders should keep a close eye on the bond action.

So what's the best way to trade the market?

If you want to add long exposure, but prefer not to have unlimited risk, you may want to consider buying the July E-mini S&P 1685-strike calls for $600 total risk. This will give you 37 days of long exposure.

—Rich Ilczyszyn is Founder and CEO of iiTrader. Follow him on Twitter: @iiTrader.

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