Keystone's Nightcap 4-20-11

Typically a calm low volume week is expected before the Easter bunny, but this week is anything but calm.  After the SPX closed 4 out of 5 sessions below the 50 day MA, this morning a large gap up changed the picture quickly.  Many traders are quick to dismiss the volume action but the fact that the big down move Monday occurred on 120% of average NYA volume while today’s big up day occurred on only a hair above average volume, is cause for concern.  The pattern of large volume sell days and lower volume buy days continues. Typically, you want to wait three days to see if the gap up move in the indexes is the real deal, or not, and this timing coincides with the FOMC fun next week.

The tech sector rebounded gloriously today and may be further aided by Apple’s positive earnings after the bell.  Semi’s were a major factor today in the push higher for the indexes.  iPhones appear unstoppable but iPad’s disappointed.  This divergence of weak financials and stronger technology does not jive with what is expected.  The initial thought is that that tech is enjoying a retail electronics bounce, but the sustained large dollar tech buying that comes in conjunction with a strong financial sector, remains on a milk carton.

Apple needs to close at 355 or higher tomorrow to negate the downward trend of lower highs (see AAPL chart in a previous blog post).  The 352 area represents the iPad2 release day with the Steve Jobs appearance so carefully monitor the 352-355 zone in tomorrow’s trading; AAPL must get above this area to show that tonight’s strength is real and has legs.

The bullish case for the indexes is apparent with the SPX now back above the 50 day MA and the 20 MA now above the 50 MA.  For weeks now, special attention to the utilities and the SPX:VIX ratio has been discussed here so the bullish move did not come as a surprise.  The utilities have remained buoyant and the SPX:VIX ratio has remained above 68 so extended bearish selling was not on the table.  In fact, the SPX:VIX ratio was in the 90’s today closing above 88, 20 points above any significant bearish danger.

Just as the likelihood of a bounce was pointed out with the NYAD closing at a low -1900 after the Monday sell-off, today the NYAD closed at a +2000 number indicating that now a move back down is to be expected. CPC put/call remains below one and the VIX at 15 shows that complacency continues to rule the markets; traders are not worried about any down side at all, and today was a mini celebration of this uber bullishness and fearlessness.

The trannies flew under the radar today with the CSX and UNP railroads traveling off the tracks. Railroads and coal go hand and hand so the higher demand for coal due to the Aussie floods must have worked thru the system now. From a Dow Theory perspective, the Dow Industrials closed at a new high, but the trannies did not, and only managed a paltry +0.3% move compared to the Dow’s 1.5% move.

In addition to the semiconductors, technology, beginning the launch today, the dollar surely added fuel to the fire.  The dollar index, $USD, dropped 0.9%, launching commodities and multi-nationals.  No wonder the Dow jumped above prior highs, many multi-nationals benefit from the weaker greenback. Even though the Dow posted a new high, the Nasdaq, Russell and SPX did not.

Even the shoe shine boy and the cab driver are short the dollar now.  The conditions are ripe for a big jump in the dollar index at any time and a short covering rally can make this move up quite dramatic.

What’s the bottom line from all this?  Caution.  The showdown is setting up for next week since the slightest comment from Chairman Bernanke will affect the dollar and thus the markets.

The tiny gap at SPX 1340 has remained unfilled so that remains a target.  For tomorrow, if the SPX hits a 1333 handle, the move up will continue a few more handles higher.  If the SPX touches 1319, then the bears will push the indexes lower.  Typically, markets are bullish the two days ahead of a long holiday weekend and today did not disappoint.  Stay on guard and close to your mouse, the move today does not seal the deal for the upside by any stretch.