Thursday, October 2, 2014

Keystone's Morning Wake-Up 10/2/14; ECB Rate Decision and Press Conference; Hong Kong Deadline

The markets are moving too fast these days to provide daily commentary and context but after yesterday's drubbing a pause for reflection is prudent. Over the last week and more, the Dow is moving triple digits daily and whipsawing violently. The VIX is elevated at 16.71; when it hits 20 at some point forward the point swings will become even more violent. As mentioned going into last week, the stock market is down 80% of the time the week after September OpEx and that played out in spades (mark this seasonality factor down on your 2015 calendar).

Markets are also weak through the new moon which was last Tuesday, 9/23/14, which played out. The Rosh Hashanah holiday began Thursday, 9/25/14, and the ole Wall Street adage is to "Sell Rosh Hashanah and buy Yom Kippur." Interestingly enough, markets sold off on Rosh Hashanah and Yom Kipur is this Saturday, 10/4/14. So perhaps a relief rally will manifest either today, tomorrow or on Monday. New money typically creates market lift at the start of a new month and if the beginning day or three are down a large up day usually occurs. So if market weakness continues into the weekend placing some long bets before the Friday close would be prudent.

The EOM and EOQ3 occurs on Tuesday, 9/30/14, and the RUT prints a down quarter continuing to roll over. The SPX monthly chart posted this morning is now fully negatively diverged with overbot conditions and a rising wedge pattern all indicating that a multi-year top is likely in place going forward. A month ago, Keystone pointed out the flattening of the 150-day MA slope on the RUT small caps which ushers in a cyclical bear market pattern--as long as the slope remains downward. The Russell 2000 also printed the death cross (50-day MA stabbing down through the 200-day MA) which ushers in longer term weakness. And yesterday the RUT prints under 1093 which is a -10% move off the early July top signaling that the Russell 2000 is officially in Correction Territory. The bears could not take out the May low in the RUT yesterday which is a feather in the bull's cap and may indicate that the bulls still have some life remaining.

Concerning the 150-day MA slopes pay attention to the Nasdaq and SPX. The SPX 150-day MA continues sloping positively keeping the cyclical bull in play and this is the key that tells you if a longer term cyclical bear market is locked into place for the entire stock market when it flattens and rolls over to the downside. In the near term, watch the COMPQ (Nasdaq) since the 150-day MA is flattening and on the verge of potentially turning down which would agree with the RUT small caps that are rolling over into a cyclical bear market. The 150-day MA prints for the last three days for the Nadsaq are 4329.73, 4331.08 and 4331.76. If bearish the markets, you want the COMPQ 150-day MA to roll over and preferably print under the 4331.76 today or at least roll over in the days ahead. If bullish the markets, you want to jam the Nasdaq price higher which will send the 150-day MA higher and indicate some rally upside fun ahead.

The 100-day MA has served as sturdy support for the major indexes over the last couple years. The SPX 100-day MA is 1958.29 and price is at 1946.16. The 1958 carries a lot of clout today so watch it closely. The Dow 100-day MA is 16879 and price is at 16805. The Nasdaq 100-day MA is 4405 and price is at 4422.

Keybot the Quant remains short the market. The algorithm number is printing well below the signal line number after the stock market collapse yesterday keeping the bears firmly in the driver's seat. Watch RTH 61.90 today as an important market directional signal. RTH 61.77 begins at in the bear camp causing negativity so the bulls need to push above this level which will signal the all-clear and allow markets to float higher and take a breather from the selling. If RTH remains under 61.90, markets will continue lower.

The UTIL 566.46 level remains key for the Keybot algorithm this week so continue watching this level. Utilities were the only bright spot yesterday with UTIL at 554. The XLF 23.07 and NYA 10630 bull-bear lines in the sand identified by the algorithm are key for market direction forward so monitor financials and the NYA index very closely today and in the coming days (further discussion continues on the NYA below).

Keystone highlighted the BPSPX chart over the last couple weeks. (type 'BPSPX' in the search box at the right to bring up that chart.) The BPSPX lost the 70 level signaling a double whammy market sell signal. Market bulls got nothing unless they can send the BPSPX back above 70. One of Keystone's most important cyclical market signals, the NYA 40-week cross, occurred yesterday with a negative cross ending the two-year cyclical bull market for stocks and ushering in a cyclical bear market (reference this morning's chart). Watch the NYA 10630 level since it will verify, or not, that a relief rally to the upside has legs. NYA is at 10572 so as long as price remains under 10630, market bears are fine and the selling in equities will continue. If the NYA regains 10630 and moves higher the fix is in and the bulls are staging a strong comeback rally to the upside.

Traders remain somewhat complacent but the CPC put/call ratio finally spiked higher on yesterday's worry up to 1.30-ish where the last market bottom occurred in early August. Thus, the CPC is open to seeing a market bounce occur. The CPCE put/call, however, is at 0.78 well below the 1.05 that identified the early August bottom. So the markets may need a little more fear and panic to show up before a near-term market bottom occurs. The VIX tagged the 200-week MA at 17.48 yesterday which created all the market bottoms over the last couple years so this hints that a near-term market bottom may occur today or tomorrow. The TRIN (Arms Index) is at 1.75 and hit 2.01 yesterday which is a touch above steady-eddy selling and starting to enter the panic selling area (where a reversal occurs). The TRIN has printed elevated numbers at near 2 or higher for 4 of the last 5 days so this hints that a near-term market bottom may be near.

The indicators for the SPX daily chart are weak and bleak wanting to see lower lows in price after any bounce occurs. The full moon is next Wednesday and if the new month buying occurs, a relief rally occurs, and the full moon buoyancy occurs, early to mid next week may shape up as a relief rally period, but then price should roll over and print more lows going forward. In the near-term for this week, the SPX hourly and minute charts are setting up with positive divergence hinting at a recovery move coming today or tomorrow.

Going forward, you will hear lots of talk about the Presidential cycle and how the October 2014 period to October 2015 period should be a solid upward move for the stock market. Take that talk with a grain of salt. The central bankers control the stock market in recent years and the presidential cycle in the past was more in concert with politicians goosing the markets with spending. The political and economic atmosphere is erratic these days so the October to October buoyancy expected may disappoint.

On the esoteric side, Keystone mentioned that his Eclipse Indicator was identifying the late September first week of October window as a period susceptible to a strong sell off, which occurs. It is amazing how such a metaphysical indicator can be so noteworthy and accurate but it is. Perhaps in the decades ahead humans will unlock the secrets of why the universe's gravitational pull and the full moon and new moon effects impact the human psyche. A Bradley turn occurs on Tuesday, 10/7/14, so a window from now through 10/14 is open for a trend change in the stock market or acceleration in one direction or the other (an inflection point). Bradley turns do not predict direction only that some type of market inflection point is at hand. Another Bradley turn occurs on Thursday, 10/16/14, so the stock market may be in store for a wild roller coaster ride during October with two potential trend changes to occur over the next three weeks. If volatility continues higher we can see a lot of down-up-down-up occurring.

Keystone has been preaching about disinflation and deflation for the last couple years and it has been lonely in this camp. Others are starting to join his outlook. Obviously the Fed's obscene money printing scheme will end and then create wild inflation and hyper inflation in the years ahead but in trading timing is always the question. Investors have been claiming inflation is at hand since late 2009 but it remains on a milk carton. As traders wait for Godot to bring inflation, the disinflation and deflation bites harder. Europe is mired in deflation a la Japan's lost two decades. The dropping commodities are a clear indicator of deflation. The global and US economy is likely not as strong as thought and if layoffs begin again and business closures increase the US will remain in a deflationary funk for the next year or two.

The much-awaited inflation may not occur until the 18-year stock cycle ends in 2018 give or take a year or two. Deflation may want to extract its pound of flesh which the Fed has delayed for the last six years with the money printing. Computers and technology are huge deflationary forces. Robots do the work of several employees and they do not have to take lunch breaks. The middle class and poor continue to suffer through structural unemployment and feel the affects of a sick economy while the high-paid professionals in the ivory towers proclaim blue skies ahead cheering the Fed that creates great wealth for anyone that owns stocks. The Fed says to H*ll with everyone else, as Marie Antoinette said, "let them eat cake"; these folks are the stupid huddled masses that do not know better anyway. Are you one of the elite or are you one of the commoners?

While everyone says inflation is guaranteed and the question is only whether the Fed raises rates in June 2015, or sooner, no one considers the fact that deflation will bite harder and the Fed may have to announce an obscene QE 4. That would take the money printing travesty to a whole new level of perversion that would make Caligula blush. The Fed will likely lose all credibility if they move towards QE 4. Obviously, everyone would finally realize the grand Fed experiment over the last six years is a failure.

The ECB Rate Decision announcement occurs at 7:45 AM EST (12:45 PM local London time). President Draghi's press conference begins at 8:30 AM EST (1:30 PM local London time). Also at 8:30 AM, US Jobless Claims are released. Factory Orders are released at 10 AM where markets may pivot. At lunch time, Fed members Dudley and Lockhart will provide spin.

The deadline by Hong Kong demonstrators for the city leader Leung to step down is at hand. The protestors threaten to occupy government buildings if Leung does not resign and he appears to be going no where. The police presence increases in front of government buildings as mainland China says the "protestors are dragging the city into chaos." These words by the communist leaders in Beijing are chilling since they hint that another Tienanmen Square may occur.

US futures are flat overnight and turn positive over the last hour. S&P +3. Keystone entered several knife catches yesterday. All trades are speculative and require due diligence. Keystone added to an ongoing long term holding in penny stock MGPHF, the graphite chip play that is mentioned now and then by investor Jimmy Rogers. Keystone bought the bludgeoned RIG opening a new long position as the daily chart is positively diverging. Even stocks like DO and RIG should receive a dead-cat bounce. Keystone also bot JJG, the grain ETF, opening a new long position which is set up with attractive positive divergence. Keystone also bot ATRS opening a new long position.

Note Added 7:51 AM: ECB leaves rates unchanged as expected. S&P +3. Dow +4. Nasdaq +4. The 10-year yield is 2.41%. Metals are lower. WTIC crude oil collapsed under 90 this morning and is now down near 89. Draghi scrapes the powdered sugar from his necktie as he drinks orange juice and inhales several donuts at the free buffet. Global markets await the ECB president's words only about one-half hour away.

Note Added 8:52 AM: Draghi's words sound like more of the same with no mention yet on the amount of QE Light he wants to provide moving forward. S&P +1. Dow -23. Nasdaq +1. 10-year yield 2.41%.

Note Added 9:07 AM: S&P -3. Dow -37. Nasdaq -3. 10-year 2.41%. Dollar/yen 108.58. Euro 1.2676. Pound 1.6158. The euro was 1.2631 about five hours ago and is now up to 1.2676. Draghi better stop talking since his words are having the wrong effect. Draghi needs to talk down the euro so the European manufacturers and exporters can pull the continent out of the recessionary and depressionary funk.

Note Added 9:20 AM: S&P -5. Dow -60. Nasdaq -5

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