Keystone's Technical Set Up for Week of 5-23-11

Lots of drama in the world, as well as the markets, these days.  The euro situation is heating up again.  But despite all this turmoil, the U.S. equities markets remain complacent, no fears, no worries, every day’s a party. Let’s explore some key technical levels and sectors for the week ahead.

Watch utilities moving forward.  They will help determine if the broad market selling will be a sustained move lower, or, if the selling results in a short V bottom event as has been the case recently, with indexes recovering quickly to jump back up towards prior highs.  Over the next five weeks, the utilities, measured by UTIL, now at 440, must maintain a value above the 411 to 418 range.  If UTIL can do this, then the market bulls will continue merrily along with sideways to buoyant markets.  If, however, price moves down thru this range, it is a sure tell of big trouble ahead and an extended move down in equities.  Another UTIL level to watch is 402.  If 402 fails, the broad markets will be cooked and serious selling will enter the markets—the type of free-fall selling where most everything is tossed out the window.

To narrow the focus and concentrate on the next five days only, watch UTIL 413.34.  That is a line in the sand.  At 440, comfortably 25 points above, UTIL has no concerns or worries, in fact, many traders are buying utilities as a safety/defensive play currently, and this is adding to market buoyancy overall.  In addition, Keystone surmises that the POMO pumps are keeping the utes lofty.  Most of the algorithm’s are programmed to follow the ute levels above, and the Fed knows this, thus, they must keep utes elevated at all costs.  That is why any weakness you see in utilities is key.

Keystone has been waiting for retail to crack and carry out the negative divergence shown on the charts.  The RTH fell from 113.3 intraday high on Thursday to 111.0 intraday low on Friday, or 2 %. Data has yet to show a great impact on retail from the higher gasoline prices as would be expected, perhaps now retail will feel the brunt, especially with the lazy summer consumer season beginning.  Train ridership continues to grow showing folks ditching the cars in favor of trains.  The increased gasoline price actually benefits many retailers who are selling gas and also traders are becoming somewhat defensive and moving into the consumer staples sector, both of these issues helping create buoyancy in retail.  For RTH, watch the 109.7 area, now at 111.5, if the 109.7 is lost, then the retail party is over in retail and broad market selling will increase.

Financials and copper both topped in February and have been sick ever since.  Financials went out with the lows on Friday.  Continued negative GS news, the C reverse split, and Congress and the public wanting someone to be held accountable for this two-year mess, has cast a pall over this sector, and financials are not in a hurry to make a comeback.  The 200 day MA is 15.5 so a test there would be in order.  The 2-10 spread continues to fall as the 10-year yield drops, this will further disappoint the bankers as their money generator stalls.  For XLF this week, watch a test of 15.5-15.6, where a quick bounce would actually be in order, but then followed by more weakness in the weeks and months ahead. Financials are broken.

Copper has attempted a comeback during the last eight days after receiving a positive divergence bounce in the daily time frame.  COMEX copper moved above the 200 day MA at 402.7, back kissed on Thursday, and closed Friday at 412.2.  Copper would need to gain over seven cents to simply begin a trek back to bullishness.  The copper charts show lower lows and lower highs and the outlook remains negative for Dr. Copper moving forward weeks and months.  Price needs to explore the sub four area so the extent of hoarding and excess inventories can be determined. Copper is the leader and it has led down since February.

Keystone watches volatility closely, the VIX.  From Friday, once the SPX lower projection was broken, the indexes moved much lower as expected and forecasted.  The VIX 17.6 level was the gauge to watch to determine if Friday’s selling was the start of extended selling in equities, or simply another blip in this sideways bull-bear struggle lately.  The VIX could not get above 17.6 during the session so prices recovered as expected.

Of interest, however, was the huge spike in volatility in the final three minutes; the VIX jumping from 17.0  to 17.4, a 2.5% move in a 120 seconds or so. This sets up an interesting Monday session since the market bears will be pushing hard if the VIX gains only 22 pennies after the opening bell.  The VIX, now at 17.43, must stay under 17.64 for the market bulls to stay in the game.  If the VIX jumps above the 17.64 tomorrow, then the market bears will be growling and selling will rule the session.

Thus, volatility, VIX, plays a key role tomorrow.  Also retail, so watch the RTH.  Keep an eye on utilities especially as broad market selling takes place.  Any selling in the indexes will be short lived as long as UTIL remains above 413.34 this week, which appears easy to maintain from its lofty 440 perch right now.  If UTIL 413.34 fails, the markets are in serious trouble; at 402 the broad markets would go into free fall.

For the SPX, now at 1333, if price hits the 1342 handle, the market bulls will be running in full force and expect the indexes to move up several more handles for a happy Monday start.  If the SPX moves below 1330.67 tomorrow, this is less than three points below the current number, then the market bears will increase the selling driving the SPX down to test support levels at 1328 and 1325, perhaps lower. Monitor Keystone’s SPX support/resistance numbers posted separately on this site.

Watch the futures to see if weakness develops. If broad market selling occurs, the VIX will act as the gauge to determine if extended selling is on tap or not.  Use the VIX 17.66 as your guide.