Keystone's Weekend Reconnaissance 10-23-11

As the frost appears on the pumpkins here in scenic Pennsylvania, what better time than now to pause, take a deep breath and subjectively study recent market events. The markets topped from QE2 in April 2011, the waterfall slide occurred in late July and August. The QE1 pump that marked the March 2009 bottom lasted for 13 months, into April 2010.  The markets rolled over and were heading over the falls during the summer of 2010 with deflation in full gear.  This caused Chairman Bernnake to step in with QE2, which lasted for 8 months, with the markets topping earlier this year.

That is how we got to this point after the Fall 2008 crash. The markets sold off substantially in August into September, many global markets, sectors and individual stocks logging 20% pull backs to reach the commonly-accepted threshold identifying a bear market.  Keystone's Secular Signals had turned before then and all remain in secular bear market territory currently. Of interest now is the slope of the 150 day MA for the SPX, still sloping downward, negatively, but the recent market buoyancy has tried to flatten out this moving average.  The last three days for the 150 day MA shows moves of 1265.98, 1265.56 and 1265.16. See how the numbers continue to decrease? This is bear-friendly. If the 150 day MA starts to slope back up this indicates that the bulls have made major strides in boosting the markets and would be very bullish moving forward. Reference the Secular Signal page on this site.

Last week we saw the typical market buoyancy from Tuesday to Wednesday during OpEx week, you can mark your calendar for 11/15/11 and 11/16/11 for next month. The Monday's after OpEx typically open opposite of the Friday close, and considering the big market spike from Thursday thru Friday due to the Fed's qe talk, a pull back would be in order.  The SPX taking out the support/resistance cluster at 1225-1227 is a big feather in the bulls cap.  The next strong upside resistance numbers are 1240, 1242 and 1247.

Keystone's algorithm, providing stellar performance this year thus far, is about 30 handles in the wrong currently.  The Fed-induced market spike saved the markets from rolling over Thursday morning. Keybot the Quant should flip to the long side if the 1239 is touched and would have already if it was not for the gap up spike on Friday morning. Those types of up moves sometimes result in an exhaustion and reversal move, thus the algo is holding on this weekend to verify the market bullishness, and 1239 will confirm that.  A move above SPX 1239 will be in concert with the EU Summit providing lots of happy talk.  Thus, simply noting whether or not the futures this evening are red or green should tell the tale.

The tone for tomorrow's trading will be set by the EU Summit results, an outline to resolve Greece's debt woes is needed at the minimum, CAT's earnings and the Fed manufacturing data.  CAT carries the weight to singlehandedly affect the markets tomorrow since it is a major proxy for China and global growth so it will provide high drama.

Lots of traders have been shorting the euro lately, thus, the euro spikes over the last two weeks--the markets always frustrating the largest amount of participants at any given time.  Likewise the equities markets, lots of traders have been trying to short the rallies, only to have their faces ripped off. The euro weekly chart maintains a weak profile, sideways to sideways lower prices are anticipated over the intermediate to longer term. Drilling down on the daily chart to take a closer look at the near term, the euro collapsed under the descending triangle that Keystone highlighted over the last couple months, failing at XEU 141, then hitting the triangle target at 132 and bouncing as October began. Over the last six days, euro price has now placed a higher high, now testing the 50 MA, but the RSI, MACD histogram, stochastics and money flow are all negatively diverged. A stutter step here and potential smack down by the 50 MA would be in order for the days ahead. Always reference the current asset relationship; euro down=dollar up=commodities down=equities down=treasury price up yields down, and, visa versa for the market bulls. This is why the euro behavior is so vital.

We will look at the technical indicators in a sec, but on the more esoteric side, three market indicators are all in play this week.  First, Keystone's Eclipse Indicator that targets a major sell off at some point over the next three weeks or so. Second, a Bradley turn window is now open with a market turn targeted over the coming days, especially from Wendesday thru next Monday. Third, the new moon occurs on Wednesday as well which typically conicides with market selling.  These are not indicators to directly trade off of but they show you the current of the water as you sit in your trading boat. Hopefully, it is not a boat without a paddle for you.

For the technical indicators, Keystone's SPX:VIX indicator is now back above 35 at 39.54, indicating that the bulls are having a party.  On Thursday, the ratio dropped under 35 indicating that a huge down day was on tap but once the Fed saved the day with the quantitative easing talk, all was fine, and the ratio catapulted skyward taking the broad markets up. Keep an eye on it, bears got nothing now, but if the 35 fails, they got a lot.

Keystone's SPXA150R Indicator is well above 25 now at 38.80 showing the bulls in full control. On Thursday, Keystone commented on the high CPC put/call number near 1.4 which is fully consistent with a market that needs to rally, which occurred. The high put/call indicates that too many traders are jumping on the bear train so the markets like to do the opposite, which in this case was to rally. The CPC has now dropped down to 0.86 indicating that traders are now running to the other extreme and becoming more and more bullish.

The NYAD spiked to a +2300 on Friday and closed at +2243 indicating that the bullish fun was extensive, and this is a contrarian signal, thus, a pull back in the markets would be prudent for Monday to remedy this high number. Over the last couple weeks, as the NYA Index price continues higher, the advance/decliners are less enthusiastic. The NYMO is reading 70 now, and the prior highs in early July, late August, mid September and a couple weeks ago, all correspond to market tops where pull backs then occurred. So the NYAD and NYMO are a couple feathers in the bear cap indicating potential Monday and/or Tuesday weakness. The BPSPX continues in up mode and this is a firm feather in the market bulls cap.

The TRIN placed a spike low sub 0.25 on Friday which is off-the-charts bullish. The closing TRIN is 1.02 exactly on top of the bull-bear line. Considering the market spike from Thursday thru Friday, and the extremely low TRIN number intraday Friday, this would be agreeable to seeing markets pull back for a rest since the behavior was too uber bullish.

Considering that the Fed saved the day last week with the quantitative easing talk, specifically linking any future qe action to the housing market, the housing data this week takes on added significance. Did the Fed front run weak housing data that will hit this week? Tuesday morning the Case-Shiller Index is released along with other housing data, and Consumer Confidence will provide an important pivot so 10 AM Tuesday should be interesting trading. Watch the Consumer Sentiment on Friday monring at 10 AM as well for a market pivot.

Another thing to watch out of the gate tomorrow is for Japan currency intervention. The 76.50 level has been defended and now we see a slight failure so a dollar/yen bounce would be in order. This should lead to dollar buoyancy which in turn would lead to equity market weakness.

Mix all this together and what to you have? The markets bounced late last week on continued happy talk from Merkozy and the Fed quantitative easing comments. This week, the NYAD, NYMO and TRIN would all be agreeable to a pull back on Monday and/or Tuesday. Also, the opposite of the OpEx action on Friday would be for the market to sell off. The EU Summit results and CAT earnings will affect markets. The esoteric market affects are in full swing now with the eclipse window, Bradley window and new moon all hitting this week favoring the bears.  Index charts show negative divergence over the last few days' time frame also agreeable to a pull back.

The market bulls have momo on their side. To keep the party going, they need good news from Merkozy and the EU tonight, and for the Fed to keep pumping the quantitative easing theme. If CAT earnings are blow-out the indexes will party upwards.

Semiconductors and tech are the key sectors to watch. The SOX is at 372 and favors the bulls, if the SOX touches a 365 handle, however, that will signal trouble for the markets.  The SPX begins at 1238 and if the futures are green tonight and the opening bell prints a 1239, the bulls will be off and running, and Keystone's algo will be back on the long side. If the market bears want a pull back, they need to push hard overnight and keep the futures red. The next two weeks of trading is set up to be some of the wildest trading that the markets have seen in a while. The VIX remains elevated above 30 causing all these wild large-point market gyrations. The market bears are favored as long as the VIX stays above 29.30, now at 31.32. If the VIX drops under 29.30, the market bulls will accelerate the upside.

Thus, to keep it simple, for Monday, watch SPX 1239, SOX 365 and VIX 29.30 as the news on the EU Summit hits the wires as well as CAT earnings.