Keystone's Morning Wake Up 6-8-11

Chairman Bernanke is the skunk at the garden party.  The markets were enjoying buoyancy all day long until the Chairman opened up a suitcase full of gloomy news. Bernanke had no offerings of great tidings and stimulus so the markets became spooked and sold off. Currently, futures are showing a red start for the Wednesday session.

Going into yesterday, the SPX only needed to drop one point to 1284.72 to accelerate the bearish selling; instead, the indexes ran upwards out of the gate and never tested any number lower—until Bernanke spoke.  The SPX came down to place a low only two pennies away from the target number seconds before the closing bell.  Markets were saved by the bell once again.

So that sets the table for today.  If the SPX falls under 1284.74, yesterday’s low, then the selling in the broad markets will accelerate, and, by the look of the futures, this should occur.  Perhaps if we explore lower support levels, the dip buyers will finally jump in to buy the dips.  As the day moves along, however, if the selling continues throughout the session, then the weakness will continue into Thursday morning since markets tend to never bottom on a Wednesday.

For the market bulls to wrestle back control of the broad markets, they need to drive the SPX up to a 1296 handle, if they can, then they will accelerate the move upwards towards, 1298 and 1307.  The SPX support levels below are 1282, 1279, 1270 with 1282 and 1279 providing the targets after today’s open.

A Bradley turn window opens today, for the next ten trading days, so a trend change may occur, and considering that this recent trend is all down, the change would be up.  Another Bradley turn window occurs directly after this one for the back half of the month so expect a lot of volatility, perhaps that VIX will finally move up substantially.

The TRIN spiked above 3 during Monday’s session verifying the bearish selling in the broad markets.  Typically a high reading like this reverses the next day and the markets will have at the least a dead cat bounce—which they did.  The TRIN moved across the one level, the bull-bear line, yesterday, signifying the bull-bear standoff and struggle occurring.

Watch volatility with the VIX using the 17.69 number today.  Now at 18.07, as long as the VIX stays above 17.69, the market bears are throwing confetti.  If the VIX drops under 17.69, the bulls are regaining control of the broad markets and the dip buyers are coming in.

BPSPX is under 70% now indicating further broad market weakness ahead.  CPC put/call hit the 1.2+ number so that told you that it was time for a recovery bounce, which occurred yesterday.  Since that 1.2+ number was hit, the markets should moderate for a few days so a major move down immediately here would not seem to be on the table.  If the markets do move down large today, watch the CPC to see if it comes back above 1.2+, if so, that would signal that the short term bottom is probably in and a recovery move will occur.

NYAD posted two lows over the last week, one at almost -2000 and the other on Monday at -1800. At the same time, the NYA moved down in price. Thus, the amount of decliners lessened as price moved down indicating that a bounce is in order.

The main indicator that market bears need to see fail is the SPX:VIX ratio. Now at 71, sitting three points above the critical 68 level that Keystone’s indicator watches.  The broad market bulls are still in good shape—unless this 68 level is lost.  If the ratio loses the 68 level, it’s over for the bulls, so watch this closely.  For example, the futures today are red, so if the indexes drop after the open, and the ratio goes under 68, it will be a blood bath today.  But, if the indexes sell off, and the ratio stays above 68, the buy the dip crowd will be there to support the indexes, and the selling should not be a big deal.

For the SPX today, if the futures hold, we will take out yesterday’s lows, so the selling will accelerate several handles lower.  SPX support is 1282, 1279 and 1270. Movement around the 1282 and 1279 levels is probably in order.  SPX resistance is 1286, 1293, 1295 and 1298. If the SPX hits a 1296 handle today, the buying will accelerate pushing the SPX up over 1300 again.

The oil inventories are important at 10:30 AM EST and the market will probably pivot on the 10-year auction news at 1 PM and the Beige Book release at 2 PM.  Thus, the morning session may be lazy, but from the 10-year auction to the close, the heat inside will match the heat outside.