Keystone's Evening Nightcap 8-11-11

Today was the bull's turn in this game of leapfrog.  The broad markets moved up about 5%, the SPX gaining 52 points and the Dow Industrials gaining 423 points, each retracing yesterdays loss.  The SPX now moving in a 1120-1172 S/R range for four days.

Wild fluctuations in overnight futures are the norm now as solidly green numbers gave way to low red numbers but after the Claims data, a green start was on tap today.  Jitters continued during the morning session, however, as XOM printed a bad tick around 10:30 AM and was halted for a few minutes.  Dow Industrials regained 11,000 as the session approached 11 AM and then drove higher as traders finished their sandwiches.

Banks rebounded today with the XLF up 6%.  BAC bounced 7%. With regulation coming, low future growth prospects, and the realization that banks are nothing more than utilities moving forward, it is hard to understand who would invest in the financials for the IT or LT. As trades, sure. Remarkable to see such large institutions trading like penny stocks day after day. VIX, volatility, is a touch under 40 so these large market moves will continue.

French and German leaders, Sarcozy and Merkel, respectively, are showing European union today announcing that a meeting will occur in the coming days.  The markets liked this news and rallied. The Societe Generale story yesterday is shown to be a rumor but with all the problems in Europe right now, the news was taken with a dose of salt. Many traders thinking that where there is smoke there is fire, and many of us remember the dire days of Fall 2008. The European banks remain the problem.

Gold pulled back on the CME raising margin requirements news. If gold follows silver's manufactured slap down in April, then a couple days of stutter stepping is in order, the real selling in gold should begin tomorrow and thru next week. Silver experienced several margin raises in the last few days of April and first few days of May, it was not a one and done event. Further, silver margins were increased only 9% for the first move, with the total margin increase at about 88% after a week or two.  For gold last night, the CME went directly with a 22% move as a first step. Interestingly, if you target the same total move as silver, the CME may raise another 66% over the coming days. In addition, 66% lends itself to a tidy two more hikes at 33% each or three more hikes at 22% which will total four over the next week or two. Keystone favors the latter outcome currently so expect three more margin hikes for gold over the coming days.

Thus, the real pull back in gold should begin tomorrow and thru next week so watch the yellow metal carefully. As gold kept making highs in the overnight session the last few days, that was a tell that the precious metal was topping. The negative divergences on the charts presented in earlier blog posts also reinforce a down move. Raising the margin requirements was the catalyst and will continue as a catalyst as the additional margin raises should continue thru next week.

Today, gold almost printed a bearish engulfing candle for the daily chart but fell a hair short, needing to close a few dollars lower.  Same with a key reversal.  The move overnight was up to 1817 to create a higher high, but gold needed to close a few dollars lower to get under yesterday's close to verify the key reversal, it did not.  But, if it walks like a duck, quacks like a duck, etc..... The affects of a gold pull back on the heavily held GLD long ETF will be worth watching. Also, the behavior of hedge funds such as Paulson's Advantage Fund, holding large gold positions.

UTIL punched up thru the 50 week MA at 413 to provide the first firm bull signal that a recovery rally is at hand.  This occurred in the last half hour but two minutes before the close, price fell back thru the 50 week MA favoring the bears once again.  This is important at tomorrow's open.  Watch UTIL, now at 413.09, if it moves above 413.71, then the broad markets will run higher, if UTIL cannot regain the 413.71 level, then the bears will continue to push the broad markets sideways to sideways lower.

For the SPX, the bulls need to push upwards to touch 1186. This level opens the flood gates for the buyers and the indexes will move up several more handles in short order. The bears have a tougher task.  They mush push the SPX down to 1121, if so, the sellers are going to come into the markets swift and strong.  You will see 1118 fail, then a test of 1112, perhaps a test down to 1101.

Retail sales data at 8:30 AM. Consumer Sentiment at 9:55 AM.  Business Inventories hit 10 AM so 10 AM is a potential market pivot point. Perhaps the PGA Championship coverage tomorrow can provide a relaxation getaway from this trading intensity. Rory better keep the ice on that wrist all evening.