Keystone's Morning Wake Up 12/15/11

Asia is playing catch up overnight, dropping about 2% across the board. The Shanghai Index, SSEC, continues to collapse under that all important support at 2300. SSEC now at 2181.

Trading volume has increased each day this week, as the selling has increased, so many traders were throwing stocks overboard yesterday. The large drop in gold was dramatic.  Gold lost the 1600 level as the euro, XEU, lost the 130 level. The metals sold off from 4 to 6%.  No commodities were safe. Platinum has now failed the 1500 level for four days and at this writing is testing 1400 already. Oil dropped over five bucks. The CRB dropped under 300 which indicates the country is moving towards deflation, and in fact Keystone's Inflation-Deflation Indicator triggered Disinflation yesterday, with the economy now on the verge of falling into Deflation. Chairman Bernanke will announce QE3 as deflation worsens, use the CRB as your guide, the more the CRB drops, especially under 290 and 280, the closer the Fed is to reacting. CRB is now at 295.

Typically, markets are buoyant from Tuesday to Wednesday during OpEx week so yesterday's action was surprising. Prices remained low all day long.  When markets sell off like yesterday, on a Wednesday, weakness typically appears in the Thursday session with lower lows, but, cosidering the crazy nature of the markets these days, the seasonal and historical moves are taking on less significance. The trading sessions are choppy now since volume is lower but volatility remains elevated in historical terms.

Volatility, VIX, is behaving strangely this week, remaining complacent at the lower relative values in the 23-27 area rather than the 30's where fear is rampant. Sturdy resistance exists at VIX 27.7 so watch that level like a hawk, if breached to the upside, the broad markets would have more sustainable downside ahead. If VIX stays under 27.7, the possibility of a Santa Claus Rally remains.

Traders continue to chase the blue chips and divvy stocks for safety but these stocks will be hit like anyhting else if a market down draft occurs.  France downgrade will be big news that will rattle markets. Some of this is being priced in currently but whenever this occurs, perhaps not until January?, it will be an overnight event where if you are on the long side, you will receive punishment, so it has to be considered for any trading moving forward.

For the SPX  today, to reiterate the prior post, if the market bears can push three points lower to lose the 1209 support, the maket downside will accelerate. If bulls can touch 1226, the upside will accelerate. A move thru 1210-1224 is sideways action. Key support and resistance levels are 1235, 1227, 1225, 1220, 1216, 1210, 1209, 1204.

In a nutshell, RTH 109.40 will provide an immediate indication of broad market direction. The RTH begins at 109.27, on the bearish side, effecting the broad markets negatively.  Claims, PPI and Empire State Manufacturing hits at 8:30 AM and will effect futures. Industrial Production is 9:15 AM. Philly Fed is at 10 AM. Natty Inventories 10:30 AM. HOV, FDX and ADBE earnings releases are important.

The euro, XEU, just went over 130, now printing 130.18, which favors the market bulls. Euro up=stocks up. Considering the massive shorts held in the euro currently, an upside bounce could launch a substantial short-covering rally in the euro and equities markets. Let's see how the data shapes up in a couple hours.