Keystone's Evening Nightcap 1/17/12

A gap up open had the bulls popping champagne corks to celebrate another day of fun. The NYA broke up thru the 40-week MA which is one of Keystone's secular signals, but, in the afternoon, collapsed back down thru ushering in the market selling and maintaining the overall markets in a secular bear market, for now. The gap at 1290 remains open and serves as a target for filling.

Keystone pointed out the CPC Put/Call chart on the weekend printing a 0.74 consistent with where market tops occur due to complacency.  Today the short interest is at a one year low indicating that the bulls are drunk and happy, the party will never end. The AAII (American Association of Individual Investors) Bearish investors reading is at a near seven year low. The bulls are drinking the spiked Koolaid dancing and singing without a worry or fear. Volatilty as measured by the VIX continues to drift lower as well, at least until today, which is another indicator that the bulls are complacent and feel the markets have no where to go but up. Perhaps the VIX is the first to prick the bull balloon as it jumped 6%, most of this occurring in the last hour and one-half of trading today. These four signals are all contrarian, complacency and no fear typically indicates market tops.

The Dow Industrials punched upwards to place higher highs but the trannies placed a high three days ago.  From a Dow Theory perspective, the bulls will need the trannies to advance and place another high. This will be difficult since FDX and UPS, two important shipping and global economic bellwethers, were downgraded today. Natty gas is now beaten beyond recognition.  Keystone was in there buying today and likes the natty gas story for 2012.  Someone needs to tap Natty on the shoulder, however, since she's going the wrong way.

The Greek talks resume tomorrow so Europe will continue along in the lime light.  PPI data is at 8:30 AM. TIC data, Industrial Production and Housing Market Index follow. Bank earnings are important with GS, PNC, STT and USB. EBAY will affect the tech sector.

Watch the NYA 40-week MA, now at 7688. As long as NYA stays under, the broad markets will drift lower.  If NYA moves above 7688, this will contribute to bullish indexes.  Watch the CRB 311.50 level.  CRB is now 67 cents under on the bearish side so markets will weaken if the CRB stays below 311.50.  If CRB moves above, the bulls will rally the broad markets.

For the SPX tomorrow, starting at 1294, the bears have some left over momo from the close today and only need to push lower to lose the 1290 level and the markets will sell off with a likely test of SPX 1281 occurring.  SPX 1281 is a line in the sand that if lost, the broad markets will be in substantial trouble.  The market bulls need to touch the 1303 handle tomorrow, if so, the upside party will resume and the punch bowl refilled.  A move thru 1292-1302 is sideways action.  Focus on NYA 7688, CRB 311.50 and SPX 1281 since they will determine broad market direction for Wednesday.

Extreme caution is required in the markets currently since the complacency and uber bullishness does not provide a floor under the markets. Therefore, if the broad markets start to tumble lower, especially if SPX 1281 is lost, markets have potential to become extremely ugly extremely fast a la August.