Keystone's Morning Wake Up 7-7-11 ECB Rate Decision

Today sure does have a lucky ring to it; 7-7-11, makes you want to throw dice.  But who is it lucky for, bulls or bears?

Yesterday saw the failure at 1344 which immediately accelerated the selling as would be expected, but the indexes quickly recovered; the buy-the-dip crowd is back in biz.

The action is indicative of a lack of sellers, as the indexes moved south yesterday, on a broad market basis, many traders are content to hold and sit tight rather than jump on the selling band wagon. The last few days the markets are behaving with this slight underlying bid, or stated more correctly, lack of interested sellers. Traders are willing to give the indexes the benefit of the doubt.

Note that for two days in a row the bears have placed a ceiling at 1341, establishing a firm beach head at this resistance level.  The market bears will gain strength each day they prohibit a move up thru 1341, today will be another test.

The market bulls, however, need to punch up thru 1341, if they simply touch a 1341 handle, it will be a big deal and the flood gates to further upside will swing open, with the indexes racing to the upside again.  SPX will test 1345, then 1349. The 1360 gap would come into eyesight.

With such a strong move over the last week, a pullback would remain prudent, with the SPX back tracing to the Fibonacci levels, and gaps, at the 1294-1312 area.

China raised their rates yesterday.  Good ole Keystone is the only one that accurately forecasted all the China rate hikes since the fun began in October 2010.  Keystone now says that China has satisfied their initial goals, which placed a last hike in this June-July time frame, and they will sit back for a while to see what happens.  The Chinese rhetoric turned dovish lately hinting that perhaps they would not perform the last expected hike but this must have been simply political posturing.  Of interest, however, is that perhaps there is some disagreement and increase in political gamesmanship between the handful of men that control the Chinese economy, especially in light of the premier change coming in 2012. The coming Chinese inflation data must be running in the 6.5 to 7.0% range, very hot, and higher than anticipated, since they went ahead with this last move in rates for now.

Markets remain very unstable, lots of odd behavior in and among oil, gold, copper, equities, treasuries, dollar, euro, with no clear resolution yet.

The ECB rate decision is coming as Keystone writes this commentary.  The first couple days this week were placeholders.  Trading will heat up today and tomorrow in front of the weekend, so stay on guard. Trichet has promised a pony (rate hike) so he better deliver shortly. The decision is imminent. The hike is expected so the affect may be muted since it is already priced into the recent euro buoyancy, which has caused a substantial part of the U.S. equity rally the last few days.  The shocker is if Trichet does not raise, the euro would plummet and the following asset relationship will be in affect; euro down=dollar up=equities down=commodities down.

If Trichet raises as expected, all eyes will be on the press conference.  ‘Strong vigilance’ are the two key words.  If Trichet says the ECB will continue strong vigilance, the euro will catch an underlying bid again and the following asset relationship will start to run again; euro up=dollar down=equities up= commodities up.

If Trichet does not mention ‘strong vigilance’ in the press conference, the euro will move down and cause equities and commodities to move lower.

The financials will determine broad market movement today.  Watching the XLF, yesterday price failed thru the 15.43 level at the open placing them in the bear camp again.  Currently, at 15.41, the XLF is exactly on top of the number that Keystone’s proprietary algorithm is using as a bull-bear line—to the exact penny; 15.41.  Talk about sitting on a fence, the financials are exactly balanced but in today’s session, XLF will fall into the bear side or bull side.  Since the algorithm has to select a side at all times, there is no neutral ground, the financials are perceived to be bearish to start today, and depending on which side of 15.41that price moves after the opening bell, that will tell the tale for financials, as well as the broad markets today.

For the SPX for today, we have the top side defined by 1341 for three days in a row. If the bulls punch up thru, if they simply touch 1341, it will be off to the races for the upside; 1345, then 1349; then the 1360 gap fill comes into eyesight.

The bears need to get under the 1331 handle today; if you see a 1330 handle, the indexes will drop several handles accelerating the selling with the bears starting to push much harder. The SPX begins at 1339 so the bulls are in better shape, only needing two initial points to run the indexes lots higher—thus, futures are important this morning. Markets remain at the mercy of euro news. The ECB decision and the Unemployment Claims number will set the tone for today. The oil inventories, delayed one day due to the holiday, will provide a potential market pivot point.

Start watching the utilities closely since they are the window to the soul of the markets. If you see the utes, UTIL, weaken and forge a path lower as the day’s move along, that will signal longer term problems for equities.  For now, UTIL continues to enjoy buoyancy and are reinfocing the bullish move in the indexes.