Keystone's Morning Wake Up 8-1-11

Goodbye July, hello August. A happy start to the month is on tap after an agreement was reached on the debt ceiling but, the votes are still to come today.  Big jump coming for the indexes as per the futures.  For the SPX today, watch 1304.16.  If the market bulls can push above that number, the buying will accelerate several handles higher in short order; 1307, 1312, 1314, 1316.

The monthly chart shows the SPX now violating the 10 month MA for two months in a row. Keep watching to see if the 10 month MA fails.  This is the early warning signal for the 12 month MA cross, if this fails, the markets fall back into a secular bear market for the weeks and months ahead. The 10 month MA is now 1288 and the 12 month is 1256--where all Hades would break loose.  The NYA is 8079, below its 40 week MA at 8155, signaling that the indexes have already fallen into a secular bear market.  But, with the big Monday pop coming, see if the NYA regains 8155 to keep teetering back and forth between a secular bull and secular bear market call, as it has for two months now.

The utilities become more and more important each passing day.  Throughout this year's pull backs in the indexes, good ole Keystone told you the markets would come up each time since the utes did not cooperate.  You will know the real deal with the downside is here when the utes lead down. Thus, during this market pop, watch the behavior of the utes, UTIL, if they recover to the upside and have a happy day, then a few day rally should chug along forward. If the utes are flat or weak today with the markets up large, that signals trouble ahead.  The gap at SPX 1360 needs filled so the door has to remain open to any possibility.

If UTIL loses the 418 level any day this week, now at 431, so comfortably 13 points above, the broad markets are in serious trouble. If UTIL loses 413, the broad markets will go into free fall. This scenario, however, does not appear on tap with this happy Monday start. Watch UTIL 418 like a hawk all this week.  The utes must maintain buoyancy all week long because next week the UTIL will have to stay above 429 to prevent the broad markets from falling, a much more formidable task. Thus, if the markets are buoyant all week and UTIL hangs out at 430 most of the time, that will not be good enough come next Monday, the utes must build up insurance this week and move higher towards 440. This is not in the charts currently, the down sceanrio is currently favored. If the utes have a weak weak and close this Friday under 429, expect serious trouble in the indexes next week.

Copper has maintained buoyancy, but not so much due to demand as it is due to the mine strikes; the Escondida Mine accounting for 7% of copper production.  The move up in copper is muted in this context since a much larger jump would have been anticipated with such a big production loss. The answer is, as shown by China PMI this morning only a hair over 50, is that the global recovery is weakening and the copper demand is not as strong as pundits say.

CPC pt/call chart shows a 1.2 reading consistent with a bottom, NYMO, NYAD, NYHL all agreeable to a bounce, SPXA150R positive divergence now in place over the last six week time period so that hints that broad market buoyancy is on tap.  Financials and semiconductor charts showing positive divergence saying that their beating is getting a little long in the tooth and they could use a little countertrend pop.

The energy trade at the end of each month is sure as the winter snow and summer sun. The energy sector always pops the last few days of the month into the ISM Manufacturing number released on the first of the month.  Until now.  XLE dropped into the end of July last Friday, sure, things should pop this morning, but it is notable that this multi-month trend has now hit a snag. This information hints that XLE may experience further weakness moving forward.  This in turn would be consistent with lower oil prices coming.  Also consistent with more of a deflationary move in the coming weeks and months.

Watch out for margin requirements to be raised in oil and commodity markets, gold, silver and so forth. These moves surprise most traders and result in erratic markets. The debt ceiling agreement takes some wind out of the commodity plays.  Europe and Middle East woes, think Syria and Ramadan, continue to affect commodities greatly.

Keystone's 2-10 Spread Indicator dropped down to the low 240's, well below the 255 line between bulls and bears, and bullish versus bearish broad markets.  The bears are in control in the financial sector but the financial charts do show the positive divergence profile to allow a brief pop to allow the sector to catch its breath, before the beatings begin again.

Volatility, VIX, jumped to 25+, highest close in a year, consistent in calling a temporary market bottom, but, rest assured, the VIX chart is long and strong, and plans on rockin' higher again soon.  The 35 level is a good target where the broad markets will bottom, but, that is probably days or a week or two away yet.

Lots of folks continuing to lose jobs, especially in banking and techology.  These are high paying jobs, upper middle class earners.  Sadly, many will come to realize in the following weeks and months that they will probably never work for that wage again. The employment situation is very ugly and is not getting any better. This all hints that the deflationary environment is inching our way again.

Bulls can enjoy the ride today; watch SPX 1304.16, that tells you if the bulls rocket ride higher, or, if the day just continues along sideways after the intitial pop occurs. Data at 10 AM may be a market pivot point.