Keystone's Morning Wake Up 7-22-11

The bulls amass a four day run from SPX 1296 to 1344, 3.7%, quite spectacular. Keystone's algorithm was within seconds of switching to the long side yesterday but certain algorithm rules held it back, remaining on the short side as the Friday session begins. The magic number is 1347.00.  If the market bulls touch that 1347 handle, the algorithm will most likely flip long, buyers will come into the market in force, and a wild bull orgy will commence into the weekend.

The market bears need to see weakness in the financials and of course, to not see the 1347 handle at any time. Watch the XLF, now at 15.36 which is above the algorithm's 15.33 number indicating that the financials are in the bull camp.  We saw the jump coming with the XLF chart showing the positive divergence a few days ago.  Look back a few pages for the chart.  Further, watching Keystone's 2-10 Spread Indicator which uses a 255 spread to separate bullish banksters from bearish banksters, exploded yesterday and now sits at 261, favoring bulls.  If financials hang in there today and the XLF stays above 15.33, the rally in the indexes will have some legs, and the SPX gap fill at 1360 will likely occur in short order.  Yesterday's action saw the SPX jumping up to fill the 1344 gap.

The markets are completely at the mercy of the news wires and will react violently up or down depending on what the talking heads say about the debt ceiling talks and Euro woes. The earnings releases provide a further back drop for moving markets one way or the other, setting an underlying tone. GE just released and the top and bottom lines beat although nothing earth-shattering. Key companies reporting today include APD, CAT, GE, HON, MCD, SLB, STI, VZ and XRX. Heavy hitters that will affect the Dow Industrials. GE is only up a dime pre-market so that will have no great affect on the Dow, at least at the open.

As a rule of thumb, however an individual component of the Dow dirty 30 moves, take that move and multiply by 8 to assess the impact on the Dow. Today's earnings releases now take on a whole new light. Four Dow components today: CAT, GE, MCD and VZ. Thus, for example, say MCD is up a buck today, that equates to 8 bucks on the Dow.  Or, if GE is down 50 cents, that equates to a drop of 4 bucks for the Dow. You can now gauge the impact of these four heavy hitters.  CAT is mucho importante since it is a proxy for China and the global economic growth story.

The President's debt ceiling deadline is today so that adds more drama to the mix. No economic data on tap so The Three Stooges; earnings, debt ceiling and Euroland, will rule the day today.

In a nutshell, the bulls are running with the ball. If they cross the SPX 1347 handle today it is a touchdown and more buying will enter the markets with force.  The next upside target is the 1355 prior high, then the 1360 gap fill. Watch the XLF 15.33 level since that will simply tell you whether or not the financials are able to hold the gains, or not, and the broad markets will move the way the financials do today. XLF 15.33 and SPX 1347 is all you need to watch today to tell you the story on the indexes.