Keystone's Morning Wake Up 8-18-11

Today is set for a much lower open, futures down large. European banks are getting hit, the 900 pound gorilla in the room is Europe and everyone is finally getting the memo.  Do not get too caught up in the down move, however. Much of the smarter trading in this type of market is trading less and trading smaller (reducing total exposure to equities). Max pain shows that higher numbers are desired this week going into OPEX tomorrow. The market move from Tuesday to Wednesday provided a long play as it always does, each OPEX week, each month.

Continue to use utilities, the SPX:VIX ratio and SPX S/R as your guides. For utes, UTIL, the bulls need to move above 429.81 to get a rally moving in earnest.  That was achieved yesterday but the price failed back under 429.81 and the broad market rally petered out.  Also watch 414.23. Market bulls moved above here to create the buoyant move this week for the indexes so keep an eye out to see if this holds after the open, or not.  If 414.23 holds, that means the down move in the broad indexes will not be drastic. If 414.23 fails, the broad market move down is going to leave a mark.

Keystone's SPX:VIX ratio starts at 37.80 and has favored bulls ever since it moved above 35 on Monday. Watch it closely. As the markets sell off in the early going today, if the 35 level holds, the broad market down move will not be a big deal. If the ratio loses the 35 level, the indexes are going to fall substantially and get ugly.

For the SPX today, if 1184 is broken, which appears to be on tap, the move down will accelerate, which also appears on tap. SPX support below is at 1180, 1173, 1150, 1140, 1133, 1125, 1119, 1115 and 1101. A failure at 1101 is a whole new can of worms that will lead to 1044 but this is most likely not the scenario to worry about today. The 1120-ish area is strong support. The bulls would need to move above 1200 to regain any kind of strength.

Keystone's proprietary algo, Keybot the Quant, came within seconds of flipping long yesterday but did not. By the look of the futures this morning, it is obvious why the algo stayed short. Also watch for the CME to raise gold margin requirements again, probably today, considering that gold price is above where they raised a week ago. Watch UTIL 414.23 and 429.81 and SPX:VIX 35 to forecast broad market direction today.