Keystone's Evening Night Cap 8-25-11

A rocket launch out of the gate today, buoyed by Warren Buffett's $5 billion capital injection into BAC, fizzled like a wet firecracker 15 minutes after the open. BAC maintained a positive day, up 9.4%, but the indexes closed near their lows ahead of Chairman Bernanke's speech tomorrow morning. Keystone's proprietary algo, Keybot the Quant, remains long for 2 1/2 days now moving into the Friday session.

The SPX nearly pulled off an outside reversal today but fell short since the closing low was not lower than Wednesday's low. The high today surpassed Wednesday's high and as projected this morning, once the SPX hit 1178.56, a rocket launch to 1190 occurred. The problem was, however, that rumors surfaced about Germany receiving a sovereign debt downgrade, so the DAX got pummelled, and the U.S. indexes sailed off a cliff. The rating agencies quickly announced that no such downgrades were planned but traders sell first and ask questions later; the damage was done. Finland then threw gasoline on the fire as they request collateral from Greece gumming up the prior agreements among the Euro countries.

The market bears, however, had a formidable task ahead for the session since they had to push the SPX over 20 points lower to seal in an accelerated downside move. The bears almost pulled it off, testing the 1155 handle for a few seconds at 1 PM before recovering. Then, into the close at 3:45 PM, the bears pushed lower again but could not even punch out a lower low than the 1 PM move, thus, despite the large down day for the indexes, the selling event was not important today. In fact, the two tests that held today actually favor the bulls since the bears could not push under the critical 1155 support level.

In addition, the utilities, UTIL, remain elevated above the 50 week MA so the bears bark was worse than the bite. The sell off was not a complete surprise since Keystone's SPX:VIX ratio, as highlighted the last few days, did not attain a 35 level as yet. Once the ratio grabs 35, now at 29.16, the indexes will move up large that day with a triple digit up day for the Dow Industrials. Thus, the failure of the ratio to not move above 35 as the buying continued for three days this week was a tell. Keep watching the SPX:VIX ratio 35 level moving forward.  Think of it as an all clear signal for the bulls.

Although interesting to look back and note how the projections worked out today, that was then, and in trading all you care about is what is in front of you and not what is in the rear view mirror. For tomorrow, we have the main event, Chairman Bernanke's speech at 10 AM from Jackson Hole, WY. One year ago Bernanke launched QE2 at this time and at the start of this week, many traders (not Keystone) felt that scenario was worthy of a repeat, but, as today's action shows, the quantitative easing prognostication is quickly losing steam. The first half hour of trading tomorrow will be filled with raw emotion. The GDP number hits before the open and Consumer Sentiment is released at 9:55 AM, five minutes before Bernanke talks. An early release of Bernanke's speech notes should occur so the markets will probably be provided a flavor of the speech before the markets open.

For the SPX tomorrow, starting at 1159.27, if the bears can push lower to move under 1155.47, the selling will accelerate substantially. The bears could not pull it off today, can they tomorrow? Four points is all they need to produce a strong negative day in front of the summer weekend. The market bulls have their work cut out. The bulls will need a Bernanke positive vibe at that 10 AM pivot point to send the SPX up to 1190.68, if so, the buyers will come in force, and the recovery rally will most definitely be back on track. A move thru 1156-1189 is sideways action with the bulls and bears both churning all day long.

Gold took a breather today since the inside traders knew of the CME margin hike ahead of time and much of that negativity was priced in already, but, as more CME margin hikes occur over the coming days, gold should continue the downside momo. Get some rest tonight since the first hour of trading tomorrow will more than likely tell the tale for the entire day. Chairman Bernanke will probably have difficulty sleeping tonight; his Superbowl occurs tomorrow morning.