Traders Watch Technicals, Europe, Oil Spill and Reform

Washington may steal the market's focus from Europe Tuesday, as both the oil spilland financial regulatory reform get prominent play in headlines.

The executives of major oil companies—Exxon , Chevron , Royal Dutch Shell , Conoco Phillips and BP America —testify before the House Energy and Commerce Subcommittee on Energy and the Environment at 9:30 a.m. Later, President Obama addresses the nation on the oil spill crisis at 8 p.m. from the White House, ahead of his Wednesday meeting with BP executives.

On the financial regulatory reform front, a joint House and Senate committee will convene to work on a compromise bill.

There are also a few data points, with Treasury international capital flow data released at 9 a.m. Import prices and the Empire State survey are reported at 8:30 a.m. The National Association of Home Builders survey is released at 1 p.m.

A dead fish coated in heavy oil floats near shore June 4, 2010 near East Grand Terre Island, Louisiana.
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A dead fish coated in heavy oil floats near shore June 4, 2010 near East Grand Terre Island, Louisiana.

Best Buy reports earnings head of the open, and the CBOE, the Chicago Board of Options Exchange, is expected to trade as a public company for the first time.

But what traders will probably spend the most time talking about is the 200-day moving average on the S&P 500, which the index failed to reach Monday.

"What our market did was remarkably predictable," said Tim Smalls of Execution LLC. "We traded up within three points of the 200-day moving average (about 1108) and that was the obvious spot for it to fail, and it did. We got within spitting distance. The financials were a little bit disappointing because they are the headline event right now."

The S&P finished down 1 at 1089, and the Dow was off 20 at 10,190. The Nasdaq, however, closed less than a point higher at 2243. Financials were down 0.7 percent on the day, with only materials, off 1 percent, a weaker performer. The safe-haven utilities, up 0.4 percent, were the best performers.

The euro moved off its highs of the day to a level of around 1.2227 late in the New York session, after Moody's downgraded Greece by four notches to junk bond status. At the same time, the market showed concerns about Spain, pushing spreads on Spanish bonds wider on the day.

"I think Greece has sort of been compartmentalized by the establishment of the ECB/IMF package," said David Gilmore, market strategist with Foreign Exchange Analytics.

Spain is another issue, however. "Spain is on everybody's mind now because the shape the banks are in. Spain is not Greece. Spain does not have the kind of problems the Greek government has," he said, noting the smaller Spanish banks suffer from bad housing loans and are being forced to merge.

"I think we have to look at this rally in stocks, rally in the euro, decline in the dollar, rally in commodities prices. It's all related to what I'll call a technical correction to the trend, and we have a long way to go before we can change the psychology of the market to think there's a future in being long risk," he said.

However, Jordan Kotick, global head of technical strategy at Barclays Capital, sees the stock market as having made an important transition. Its current trend is neither higher or lower. "The stock market has not really been falling since mid-May. It's moving side ways and that's true of most global equity markets. The stock market has gone from its April peak to aggressively bearish to sideways," he said.

"The question is can it transition from bearish to sideways to bullish," he said. Kotick.

Kotick said other asset classes, like oil, have been moving out of bearishness, along with equities. "One of the problems has been the fall of the euro. Now the euro arguably for the last five or six sessions has been going higher, so the Fx markets are putting on the brakes. That's important," he said.

"This is early stages," he said.

Besides the 200-day moving average, there's a lot of focus on the 1040-1050 zone, the level the S&P 500 has successfully held after tumbling through the 200-day.

"It wouldn't surprise me if we get near 1125 or so. I'm not confident in the ability of the market to get there, but I think it will," said John Roque, managing director at WJB Capital.

Roque, also a technician, said investors are "disconcerted" but not yet bearish. He points to the put/call data, which is not at an extreme high, compared to other sell offs.

The "line in the sand" remains 1050, which could be challenged again, says Roque. He said if the S&P touches that area again, it will likely break down through it, and if it does, the next levels to watch would be 990, and then 950.

Roque also said its interesting to see that northern European markets, particularly Germany, have been outperforming the U.S. over the past month despite the worries about European sovereign debt.

Bank of America Merrill Lynch's Mary Ann Bartels has another view. She says in a note Monday that the market may be ready to break out to the upside, as it's finally in a position to react to oversold conditions.

Bartels, head of technical analysis, points to the 1040 to 1105 range the market has been stuck in for the past 16 sessions. She says if the S&P were to move above 1110, it could move to the next level of resistance at 1150. If it could maintain a break above 1150, she would reverse her negative view on stocks.

She said 1107, the 200-day moving average, is also a point of resistance. "A sustain break above 1150 (January 2010 highs) would point to an improvement in the outlook for the market. Key support remains 1044.50 - a close below this level would indicate that a deeper correction is likely to test support near 1000-950," she wrote in a note.

Bartels said a risk to the market is the "de-risking" of commodities by large speculators and she expects to see more selling.

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