Keystone's Evening Nightcap 10-19-11

The volatility is at play as described in this mornings missive; the markets experience another wild whipsaw-style day. The VIX remains elevated favoring bears. The XLF came down to the 12.62 level at the close. How does Keystone always know these levels? XLF, now at 12.61, will make a decision at the opening bell tomorrow. If the XLF stays above 12.60, the market bulls will throw another party, the booze will flow like water. If the XLF loses the 12.59 level, the broad markets will sell off.

Since the financials are market bullish overnight tonight, albeit one or two pennies bullish, the selling today had zero impact. The market bulls are having fun with the upside since semiconductors, utilities, retail and financials are four sector pillars of support. The market bears are no slouches either since they continue to keep copper, commodities, and the higher volatilty, in their camp. XLF 12.59 is the number to watch when the bell rings and its decision will tell you which way the indexes will go.

For the SPX tomorrow, Thursday, starting at 1210, the bears need to see 1206.30 and the selling will noticeably pick up, growing stronger, indexes will fall additional handles quickly, the SPX will quickly test the all important 1204 and more than likely fail, then price will head down towards 1200. The market bulls, although they have four sectors in their camp, must push the SPX 20 handles higher tomorrow to touch that 1230 handle, if so, that is like ringing a bell, you will see the markets explode to the upside, but, 20 handles upwards is a tall task, especially with the negative news flow occurring tonight. A move thru SPX 1207-1227 is sideways slop.

Looking at the Dow Industrials today, five of the Dirty Thirty were up today; KO, INTC, PG, TRV and WMT. What is that telling you? KO represents buying in a stable stock that has already reported. INTC is another company that reported, and beat, perhaps a new darling for the tech traders since AAPL laid an egg. PG, consumer staples, a safe trade during troubled times since we all have to continue brushing out teeth, washing our clothes and, well...., let's just say we all need toilet paper as well.  TRV is an individual stock story. WMT is a play on the consumer seeking lower prices in hard times. These plays show that traders are defensive, seeking perceived safety trades, as a place to park money.

Keystone's SPX:VIX Ratio Indicator fell under 35 at 2:25 PM indicating that the sell off today would be large, but, at the last minute of trading exploded vertically to print a 35.13.  If the ratio stays above 35 tomorrow, the bulls got game, if the ratio falls back under 35, that indicates a large sell off day is on tap, the Dow Industrials will have a triple digit loss.

This mornings missive talked about the need for markets to sell off to provide the NYAD spike high of +2100 some relief, which occurred today. At -1353 now, it allows market movement in any direction so it's not of much use now. If you see a big sell off and a -2500 print, that will show the selling is overdone.  BPSPX remains in rally mode but the negative divergence will try and turn price back down, this will be a multiple day event to watch.  The put/call CPC prints 1.12 today. Note how the last few days show a sideways move thru 1.00-1.19. Above 1.2 shows that the bearishness is rampant, fear is in the markets, and, since it is a contrarian indicator, indicates that the markets should rally to ring out this strong bearishness.  But, the CPC is not above 1.2. It was 6 or 7 days ago but the markets already rallied to ring out the negativity, thus, the CPC is waiting to either shoot above 1.2 again as the broad markets sell off, or, keep drifting lower slowly, which continues to crack open the door for a market sell off ever wider each day.

In a nutshell, keep it simple, the high drama is XLF 12.59 when the bell rings, that will tell you broad market direction tomorrow. Also watch SPX:VIX 35 level. Lastly, watch SPX 1206.30 on the low side and a 1230 handle on the high side. If either of these levels are hit, the market move in the indexes will accelerate in that same direction.