U.S. stocks closed mostly higher on Wednesday, with the Dow and S&P completing a massive comeback spurred by a surge in oil.
"If you look at the relationship between the the Dow and the S&P, it's a little off today, meaning that the Dow is leading the S&P," said JJ Kinahan, chief strategist at TD Ameritrade. " That's got to do with what's going on in oil."
West Texas Intermediate gained about 8 percent in choppy trade after the Energy Information Administration said U.S. inventories rose by 7.8 million barrels last week. Crude prices briefly erased gains following the data release, but surged on a weaker dollar.
WTI on Wednesday
The dollar traded 1.65 percent lower against a basket of currencies, with the euro gaining 1.6 percent against the greenback, as weak U.S. services data suggested another Federal Reserve rate hike seems more unlikely.
"I ... believe oil will dictate stock prices," said Peter Cardillo, chief market economist at First Standard Financial. "I think it's safe to say we are highly dependent on oil."
The ISM non-manufacturing index January reading came in at 53.5, below the expected 55.1. It is also the lowest reading since December 2013.
"The lions share of the U.S. economy is services," Randy Frederick, managing director of trading and derivatives at Charles Schwab, said ahead of the data release. "If we see a slump in [ISM], we're going to see a sell-off in the market."
Read More Bill Gross: 'Shades of 2007' as central banks fail
Stocks traded in a wide range Wednesday, with the Dow Jones industrial average swinging over 400 points.
The Dow opened 100 points higher, but fell over 150 points amid the weak ISM reading and the rise in crude inventories. In afternoon trading, however, the blue chips index recovered and closed over 180 points higher.
"We're in a textbook transition from a bullish environment into a bearish environment," said Adam Sarhan, CEO of Sarhan Capital. "What's happening now is strength is being sold, not weakness being bought." "The inability to make a meaningful bounce off the January lows signals, to me, ... we're in the early stages of a bear market, he said.
Dow Jones industrial average intraday
The S&P 500 also traded in a range, falling more than 1 percent at its session lows, before turning positive and closing 0.5 percent higher as energy and materials led.
The Nasdaq briefly turned higher in afternoon trading, after falling about 2 percent at the lows. The index closed nearly 0.3 percent lower.
"There's some level that marks the right intersection of where the economy is," said Steve Blitz, chief economist at ITG Investment Research. "The equities market is in the process of finding it."
Read MoreStop thinking short term, CEOs: BlackRock's Fink
Oil initially rose on news that Russia may be open to a deal with OPEC in order to cut production.
Art Hogan, chief market strategist at Wunderlich Securities, said that "when you start getting more people talking about production cuts," oil has a greater potential to climb back from its lows.
However, Schwab's Frederick, said "I think the oil bounce is more of a technical bounce." "We've had a pretty steep sell-off in oil recently."
"Equities and oil are very correlated right now, whether right or wrong," he said. "At some point, we're going to have to break from that."
Wunderlich Securities' Hogan said the de-coupling of oil and stocks would take place if crude prices manage to hold above $30 a barrel.
Read MoreInvestors like AIG's alternative to Icahn plan: CEO
ADP reported that private U.S. payrolls jumped 205,000 last month, above a consensus estimate of 195,000.
"Bottom line, no job growth in manufacturing and job losses in energy are certainly being offset by other areas of the economy, particularly services. This begs the question over sustainability as none of us should be blind to what is going on with the macro," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.
Investors also digested a slew of corporate earnings reports from companies like, General Motors, Merck, Yahoo and Comcast, among others.
"The problem is that we've got generally lousy [earnings] numbers with no hopes of them getting any better," said Maris Ogg, president at Tower Bridge Advisors.
Read MoreEarly movers: CMCSA, GM, MRK, MRVL, BDX, IR, YHOO & more
U.S. futures held near the flatline for most of the morning on Wednesday, before rising on remarks made by New York Fed President William Dudley.
According to MNSI, Dudley said that continued tightening on conditions would weigh on the Fed.
He also reportedly warned that additional strength of the U.S. dollar could have "significant consequences" for the U.S. economy.
His comments come as the Fed ponders its next move on monetary policy. The Federal Open Market Committee in December raised its interest rate target a quarter point after seven years of keeping it near zero. It was the first rate hike in more than nine years.
U.S. Treasury yields whipsawed Wednesday, with the benchmark 10-year yield trading at 1.88 percent, after hitting a one-year low.
Read More Bill Miller: I lost 20%, but still bullish
In Europe, stocks closed lower, with the pan-European STOXX 600 index falling 1.6 percent. Asian equities fell broadly overnight, with the Nikkei 225 index dropping 3.1 percent.
Major U.S. Indexes
The Dow Jones industrial average ended 183.12 points higher, or 1.13 percent, at 16,336.6, with ExxonMobil leading advancers and McDonald's the greatest laggard.
The closed 9.5 points higher, or 0.5 percent, at 1,912.53, with energy leading six sectors higher and information technology the greatest laggard.
The Nasdaq composite fell 12.71 points, or 0.28 percent, to close at 4,504.24.
The CBOE Volatility index (VIX), widely considered the best gauge of fear in the market, traded above 21.
Advancers led decliners 2 to 1 at the New York Stock Exchange, with an exchange volume of 1.19 billion and a composite volume of 5.17 billion at the close.
WTI settled $2.40 higher, or 8.03 percent, at $32.28 a barrel. Gold futures for April delivery settled at $1,141.30 an ounce.
On tap this week:
Wednesday
Earnings: MetLife, Allstate, AvalonBay, Boston Properties, GoPro, Lincoln Natl., NXP Semiconductor, Yum Brands
Thursday
Earnings: AstraZeneca, ConocoPhillips, Philip Morris, Cigna, Clorox, Credit Suisse, Dunkin Brands, NY Times, Tempur Sealy, Hartford Fincl., LinkedIn, News Corp., Symantec, Decker's Outdoor, DeVry Education, Lions Gate
7:30 a.m.: Challenger Job-Cut Report
8:30 a.m. Initial claims; productivity and costs
10 a.m. Factory orders
10:30 a.m.: Natural gas inventories
4:30 p.m.: Fed Balance Sheet/Money Supply
5 p.m. Cleveland Fed President Loretta Mester on economy, policy
Friday
Earnings: BNP Paribas, Nippon Telegraph, Estee Lauder, Toyota Motors, Tyson Foods, Moody's, Weyerhaeuser, Aon, CME Group, Ametek
8:30 a.m. Employment report; international trade
1 p.m.: Oil rig count
3 p.m. Consumer credit, Treasury STRIPS
*Planner subject to change.
More From CNBC.com:
- Gartman: Pickens is wrong on oil—here's why
- Kors shares jump as less bad is good enough
- Ex-drug CEO Shkreli hires Jay Z, Diddy lawyer
DISCLOSURE: Comcast is the parent company of NBCUniversal, which owns CNBC.