Keystone's Market Action 7-18-11

As projected for today, the SPX showed weakness and came down to test that 1307-1309 gap area and 50% Fib retracement again.  Once the 1308 handle was lost the trap door opened to the 1298-1300 gap area which is also the 62% Fib retracement. This is a logical area to bounce from.

Note the semiconductors, SOX. Price now down into the 380’s, but positive divergence is set up on the weekly and daily charts so price will  bounce nicely in here. Obviously this means some semi individual names will bounce this week such as TSM, ADI and LLTC. Thus, watch the semi’s line out in here probalby today and tomorrow and then move up as the week progresses.

Keystone’s algorithm is watching retail, RTH, the 109 level, now at 109.17, only 17 pennies above danger.  Thus, if the move down here for the broad markets was sustainable, this should have failed, it did not, at least not yet. Keep an eye on it; this will tell you today's broad market direction form here out.

Interestingly, financials, XLF prints a lower weekly low compared to June with the indicators positively diverged which means much of the bad news for the banksters is priced in.  The 2-10 spread is at 252 which hurts the banks since it is under 255. The XLF daily chart is also positively diverged so watch the financials line out over the next couple days and recover; a similar set up as semi's.  This means that much of the bank earnings news should be positive.

SPX:VIX started the day under 68 indicating broad market weakness ahead, and now that it has dropped to a 60 handle the triple digit down day for the Dow Industrials is in play.

The NYA moved down thru the 40 week MA this morning which is a very bearish signal for the long term.  Price will probably oscillate above and below this critical MA as it did in June so keep an eye on it over the coming days to provide hints on market direction.

Volatility, VIX, move is muted today as well.  A 10% bump is nothing to sneeze at but for this big move down in the indexes volatility is not spiking as much as would be expected.  This hints that a bounce is coming as well. The markets are looking for resolution in the debt crisis situation as well as the Euro woes and since things remain sketchy to start the week of trading, the markets are trailing off while gold climbs.

The bears are enjoying a nice down day so far but considering the chart set ups as mentioned above, the 1297-1298 gap fill and 62% Fib may provide a temporary bottom from which the indexes will bounce from and head back up. The utes remain elevated reinforcing the thought that any sustainable downside is not on tap currently. SPX made a low of 1298.67 thus far today testing this 1298-1300 area.  Thus, a bounce should be expected from 1297-1298 but as always, take things minute to minute and hour to hour.

Should the indexes slide further south with the SPX moving under 1298, watch 1289 as a warning signal where the bulls have really begun to lose it, then 1258, the starting year number would be the line in the sand.  At this juncture, these moves lower do not appear on tap right now but we will take it as it comes.  A bounce from 1297-1298 is currently expected over the next day or two.

Watch the RTH the rest of the day, if RTH stays above 109, then this selling will not gather any steam, if 109 is lost, however, the bears will be growling strongly and the indexes will lose several more handles in quick order. Last print on RTH is 109.15 so the bulls are hanging on for now.