Keystone's Nightcap 4-18-11

Traders are yearning for better earnings.  With the shortened trading week, lower volume sessions were anticipated but instead, the NYA traded at 120% of its average volume today, keeping the trend of large volume selling days and lower volume buying days in place. In addition, even though volatility took a jump in the morning, fearlessness returned by the close with the VIX sporting a 16 handle at the bell.  CPC printed under 0.9, no matter what selling occurs, the majority of traders still have the buy the dip mentality and complacency rules.

Technology and financials will move markets tomorow with GS, Big Blue, Yahoo and Intel reporting earnings.  More importantly, and always a market mover, are housing starts that hit before the bell.  As mentioned in the blog today, the downside was limited since the SPX:VIX ratio, closing at 77, did not move under 68 to signal an extended selling event.  The utilities maintained buoyancy as well indicating that the downside was limited.  SPX support levels at 1296 and 1298 held and 1307 provided a resistance ceiling during the final hour of trading.

Of interest last week, which no one noticed except good ole Keystone, was the SPX closing under the 50 day MA for three days in a row, recovering on Friday, but today gapping under at the open and staying under the 50 MA all day long.  The SPX has now closed under the 50 day MA for four out of the last 5 trading days.

The NYAD printed a -1900 number so a bounce in the indexes from here would be prudent.  Other pal's like NYSI, NYUD and NYHL are in the negative camp but are agreeable to a bounce either tomorrow, or within a day or two.  Typically, in front of a three day holiday weekend, indexes will favor the bulls the two trading days before the holiday, so in a perfect world, weakness in the indexes tomorrow will lay groundwork for a bounce Wednesday-Thursday as we all get ready for the Easter bunny.

If the broad markets continue down tomorrow, watch the utilities and the SPX:VIX ratio.  If UTIL remains above 408, then the selling will be short lived and the indexes will recover as the week moves along.  If UTIL loses 408, Katy bar the door, this is a big deal, the whole dynamic changes, broad market selling will accelerate and the bears will leave a mark.  Keystone expects more of the same tomorrow, perhaps additional weakness but the utilities will remain buoyant and the downside will be limited.  Similarly, if the SPX:VIX ratio stays above 68, the sell side will be short lived, however, if the ratio loses 68, Katy has to bar that door again.

The tiny gap above at SPX 1340 remains unfilled and after the jittery action the last few days, we now have gaps at 1323 and 1315 as well that will need filled.  Underneath sits gaps at 1300 and 1280 so SPX closing prints should be coming in these areas.  For tomorrow, if the SPX moves above 1313, the bulls will accelerate the buying.  If the SPX touches a 1294 handle, the bears will increse the selling pressure and explore lower support levels, probably with an eye on that 1280 gap fill.  If selling occurs, use the UTIL and SPX:VIX as your guide.  Remember, indexes are typically buoyant for the two days in front of a long holiday weekend so the bulls should surface as you search for a ham sandwich on Wednesday.