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Market Undercurrents Favorable as Traders Weigh Fed Moves

Weekly jobless claims and the Philadelphia Fed survey will be picked over by traders Thursday as they try to determine whether the economic news is weak enough to spur Fed easing or strong enough to keep the Fed sidelined.

In a quiet summer market, talk of what the Fed will do next has become about the biggest feature, as European news has temporarily slowed down. Each economic report is being examined for what it might mean for the economy, and also the Fed’s decision at its September meeting, where until the last few days, it was widely expected to embark on a new round of quantitative easing , or asset purchases.

Stocks Wednesday drifted with mixed results, but there was plenty of action bubbling under the surface that some technicians say could be a bullish sign for stocks. While the Dow fell 7 to 13,164, the S&P was up 1 at 1,405, and the Nasdaq was up 13 at 3,030, but the trailing small cap Russell 2000 gained 7 points to 804. The Dow Transports, also a worrisome laggard, jumped 60 points, or 1.2 percent to 5,142.

Treasurys, meanwhile, saw heavy selling which sent the 10-year note yield to a three-month high in an inverse move to prices. The 10-year was yielding 1.80 percent, after a sell off traders say was the result of better economic reports. They also pointed to a major sale of 10-year Treasurys overnight in the Asian session, which sent the 10-year yield higher.

Wednesday’s data includes housing starts and jobless claims at 8:30 a.m. ET and the Philadelphia Fed survey at 10 a.m. Earnings reports are expected from Wal-Mart, Dollar Tree, Sears Holdings, Ross Stores, GameStop and Children’s Place Retail Stores, ahead of the opening bell. Aeropostale, Gap, Brocade and Cosi report after the close.

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WMT
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DLTR
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SHLD
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ROST
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GME
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PLCE
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GPS
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BRCD
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COSI
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Jobless claims are expected to total 365,000, up from 361,000 last week. Last week’s claims were encouraging in that it was the second week of an unexpected decline. “If it falls down closer to 350,000, you’ve got a trend,” said Daniel Greenhaus, global market strategist at BTIG.

“The Philly Fed is important because of what happened with the New York Fed this morning. These reports are your first look at August data, so they’ll be important for coloring the picture,” he said. The Empire state survey Wednesday showed contraction for the first time since October, 2011. The Philadelphia Fed survey is expected to come in at minus 6.5, after a 12.5 decline last month.

Stocks could get a lift from Cisco’s better-than-expected earnings report. Cisco jumped in after-hours trading after raising its dividend by 75 percent.

The S&P 500 has been flirting with the 1,400 range after breaking above it for the first time in three months a week ago Tuesday. While the 1,400 level is psychological, there is a technical level just above it that traders are watching. The S&P failed to hold above 1,407 Tuesday.

“It’s really the 1,407 to 1,410 level that’s the level of resistance,” said Scott Redler of T3Live.com, who trades the market’s short term technicals. “If we can get above it and stay above it, you’ll get another round of short covering. You then test the highs of the year, which are 1,415 to 1,422, and I think you’ll be there by Labor Day.”

Redler said the market is in a digestion phase. A level he would worry about is 1,395. “If we close below 1,395, a lot of momentum traders, like myself, will lighten up and probably go net short.”

He said the action in the market Wednesday was healthy. “The Russell is heading up and on the verge of breaking a downtrend, and the Transports actually participated today so there’s a lot of sectors supporting this recent move.”

Sam Stovall, chief equity strategist at S&P Capital IQ, mentioned the changing views on Fed easing in a note Wednesday and said he expects to see a near term pullback that should hold in the 1,370 to 1,390 area. “On the upside, there is a little chart resistance left for the S&P 500, with the next key level being the April high of 1,422. The S&P small- and mid-cap indices appear close to breaking out of fairly complex bases,” he noted.

Stovall wrote that the outperformance by the small caps is a bullish sign for the overall market, and he too pointed to the fact that Transports are close to breaking a bearish trend line.

Follow Patti Domm on Twitter: @pattidomm

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.