Market Insider

Wall Street's bull just won't give up, even in the face of crumbling support from oil and the dollar.

Stocks looked set for a sell off Wednesday but recovered most losses to finish slightly lower, as oil dropped nearly six percent and the dollar rose, factors that typically work against the stock market.

For the second straight day, energy stocks were a drag, losing 2.1 percent as the biggest decliners. The Dow was off 26 at 9070, after dipping as much as 82 points. That was its biggest drop since July 22 and its first two-day decline since June 24.

The S&P 500 defied traders who thought it would fall through support levels, taking the stock market lower. It finished down just 4 at 975.

"At some point, we have to come back down to earth. We're way overbought..by every metric," said Tim Smalls of Execution LLC. Smalls said relative strength was at about 96 on Tuesday. "It should be mid range anywhere from 35 to 65."

He also noted another interesting market event occurred Tuesday. The 200-day moving average on the S&P was higher than the previous day for the first time in 571 consecutive days, the third-longest such streak in history. With the exception of one in the 1930s, Smalls said after breaking the five longest, similar streaks, stocks gained an average 6.15 percent.

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Smalls said he expects the market to continue "plodding along" and for now that could mean higher. "I think the market acts incredibly well. I'm surprised it acts so well," he said.

Getting Technical

Traders have expected stocks to sell off all week, after an 11 percent move higher in the previous two weeks.

"The market is still being pressured to the upside and nobody really understands why," said Scott Redler, a technical analyst with T3Live.com.

"The bears had every reason to sink their teeth in with China down 5 percent overnight. Commodities took it on the chin with the dollar strengthening and a soft Treasury auction," he said.

Redler said shorts could be forced to cover if the S&P moves above the 980 to 982 level. "There's really no resistance in the way until the psychological level of 1,000," he said. "There's been a real tug of war between the bulls and bears. 968 to 970 held for the last four days, which is a very high level consolidation after such a big move."

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If the market moves lower through that level though, the next support level for the S&P is 955 to 960.

What to Watch

Thursday's market will be bombarded by earnings reports from a wide range of companies. The highlights include big oil, including Exxon  and Royal Dutch Shell and Dow components Travelers and Disney. Disney reports after-the-bell.

Other earnings are expected from Kellogg, Alcatel-Lucent, AstraZeneca, Colgate-Palmolive, Dow Chemical, Motorola, Sony, Siemens, Waste Management, Newell Rubbermaid, Mack-Cali Realty, Apache, Avon Products, Barrick Gold and Becton Dickinson. After the bell, there are reports from MetLife, First Solar, Pitney Bowes. 

Weekly jobless claims are reported at 8:30 a.m., and another major Treasury auction takes place in the afternoon. This time, traders will be watching for results at 1 p.m. of the auction of $28 billion in 7-year notes.

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Treasury has had mixed results from its note auctions this week so the 7-year is being watched closely. "The 2-year was not the worst, but it wasn't the best. Today's 5-year was not good. Obviously, as you move higher and higher out to the 7- to 10-  to 30-year, whatever concerns exist are exacerbated," said Dan Greenhaus of Miller Tabak.

Bonds came under increased pressure after the record auction of $39 billion in 5-year notes Wednesday. Rates moved higher along the curve. One concern this week has been the light showing of indirect bidders compared to the most recent auctions. The "indirects" include foreign central banks.

The bid-to-cover was 1.92, the lowest level since September, and Treasury paid up to sell the 5-years, at 2.698 percent.

"The theory is the Chinese and a couple of Asian central banks are not participating to the same degree that they were a month ago. It's very difficult to say," said Greenhaus. "But with each passing month, we're selling more and more debt. If inflation is not a concern in the shorter term, with each passing month you get closer to that period of time where it does become a concern and weakness in the dollar becomes a concern."

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"If that 7-year is weak tomorrow, you could see a move higher in yields across the curve," said Greenhaus.

The 10-year yield fell to 3.664 percent Wednesday. The dollar gained nearly a full percent against the euro, to $1.4035. It gained 0.4 percent against the yen to 94.97 yen per dollar.

Oil fell nearly 6 percent to $63.35 per barrel after reports of a surprising build in inventories. 

"It was an incredible run there. We had literally 10 up sessions in a row that were built upon factors as diverse as positive earnings surprises and housing data," said John Kilduff, M.F. Global vice president.

"Once we tripped a bit on the consumer confidence number (Tuesday), and we got signs of the first inventory rebuilding in a while, the momentum that was in the market fell on itself. So we saw a good amount of profit-taking," he said. "The dollar came back too, so everything that had been working for the rally worked against it. The $70 area is the top of the range, but I do think we'll be closer to that level then go back down."

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