Keystone's Evening Nightcap 9-12-11

The markets stare into the abyss today only to receive a reprieve with minutes to go, just like last Tuesday, and Friday. All of you are well versed now on the importance of the utilities at this stage of the game and must be sick of listening to Keystone repeat the mantra over and over. With the indexes firmly bearish and teetering on the edge of collapse today, the utes, UTIL, 50 week MA serves as a line in the sand, a trap door, that signals that the broad markets will go over the falls within minutes.

UTIL came down to pierce the 50 week MA at 2:19 PM EST, armageddon had arrived, but, just as quickly, the failure was reversed. The signal must remain in place for seven to ten minutes. If so, that locks in the fate of the equities markets and the indexes will collapse in 0 to 20 minutes time.  The failure of the 50 week MA only lasted for four minutes before the invisible hand saved the day.

As the utes catapulted upwards bringing the broad markets with them, the news wires were quick to credit an FT story concerning China stepping in and assuming rich Uncle status over Italy. Keystone told you about how China was one of the very few cards left to play on the table in the weekend's Key Events and Market Movers missive.  Europe is China's number one customer, the U.S. is close behind, thus placing China between the rock and a hard place. If they choose to go it alone, their economy is not self sustainable and with their largest customer unable to buy anymore trinkets and beads, China will collapse. If China steps up the pace with buying European bonds, especially Italy, they can at least keep the global party going for a while longer. This appears to be the direction desired although China is very apt at saying one thing and doing another. Let's wait for confirmation concerning their generosity tomorrow.

But back to the utilities.  Keystone's proprietary algo, Keybot the Quant, was focused on the utes today, and Keybot is not the only robot that does so, in fact, the majority of the bots have the utes programmed into the algo's.  Thus, the fact that the 50 week MA was lost for UTIL did not go unnoticed. This is a key algo tool. The big shots know this, thus, what better time to insert Plan G (we should at least be up to about Plan G by now), then at the very time that the markets are about to go over the falls.

Keystone is not a conspiracy theorist, simply conjecturing on today's action and fitting the pieces of a puzzle together. Rest assured, that if the China news did not occur at 2:23 PM-ish today, to save the day, the markets would have collapsed, the SPX would have went to 1120, failed, then tested 1101 and more than likely failed, and we would be discussing when 1044 was going to occur in the days ahead. Instead, Keystone will show you what to watch tomorrow as we all watch to see if a recovery rally begins again.

SocGen acted as extra insurance, stating that all is well, they are well capitalized, nothing to see here, move along.  We have all seen this story before but in trading you play the cards in front of you. We cannot worry about the future direction and outcome of the markets months or a few years from now, we must deal with the markets in the short term, while both are feet are firmly positioned exterior from the casket.  Most of all, Keystone could care less whether the markets go up or down, all he cares about is being on the right side of the trade, that is all that matters in trading.

Let's talk technicals.  Gold pulled back today over forty bucks. The charts are set up with negative divergence so let's see how far she wants to drop. If the CME raises margin requirements that will be like throwing gasoline on this fire to the downside.  The Dow Industrials regained 11,000.  For tomorrow, as per Keystone's algo, watch semiconductors, retail and commodities. Best Buy's numbers are important since they will directly effect the retail sector and Retail Sales Wednesday morning will provide further color.

If SOX, now at 358.96, moves above 362.27, the bulls will be dancing. If RTH, now at 102.50, moves above 102.95, only 45 measly cents, the bulls will be rockin'. If CRB, now at 334.07, moves above 338.34, the bulls will be throwing confetti. If any two of these three bullish levels are hit, the recovery rally will be taking off to the upside again. The bears, however, remain in control of these markets since Keystone's SPX:VIX ratio is well under the 35 level with a 30 handle. If the bulls start to run tomorrow and the ratio takes out 35 there will be no turning back, the recovery rally party will be in full swing with the booze flowing like water.

The bears are not finished. Watch the copper weakness since the markets have limited upside with the doctor in sick bay. Further, copper is a commodity and this places a drag on CRB to help prevent it reaching its bullish goal listed above. Also, any strength on the dollar will continue to slap copper and commodities.  The financials remain ill as well although the bounce today in the XLF occurred off the weekly charts positive divergence and the charts do remain constructive for some buoyancy for the financials ahead.  Volatility remains elevated placing a wet blanket over the markets.

 For the SPX tomorrow, only pennies of upside are needed, 25 cents to be exact, and the market bulls will run the indexes higher. Thus, watch the futures closely overnight. Any hint of green will signal that the bulls are running tomorrow. The bears need to show red futures at all costs if they plan on bringing game tomorrow.  If the China news turns out to be a flash in the pan, watch the 1135 handle on the SPX, if it is touched tomorrow the indexes are in serious trouble.  Under this scenario, go back to watching the UTIL 50 week MA to see if the abyss is approached once again.  It is difficult to reason that the markets would be able to hold up on a fourth test in six trading days.  A move thru 1137-1161 will frustrate bulls and bears. 

Watch Keystone's SPX S/R list since the 1141, 1140, 1138 and 1136 support levels were key today. Note that the close tonight was 27 cents above the critical 1166 resistance, now support. The resistance cluster at 1173-1178 may come in to play tomorrow if the futures are green and the day starts out happy.

The NFIB Small Biz survey is out at 7:30 AM and this news has been bad for months now. The survey has street cred since it told of all the market trouble in advance while other data sang a happy tune.  Further bad news is expected; the risk would be for any positive aspect since this will help elevate markets.  Diesel fuel consumption hits at 9 AM so we will see how the truckers are doing, thus shipping, thus the economy.  The 10-year auction is a key pivot point tomorrow at 1 PM.  During OPEX week, professional traders usually place a long trade Tuesday that rides into Wednesday to collect at the window so see how that works out over the next two days. Most importantly, tomorrow we find out if Europe has a rich Uncle named Uncle China.