Keystone's Morning Wake Up 1/30/12

Key action in China and Europe overnight.  The two-month market rally received its oomph from traders front-running the China triple R (bank reserve requirement ratio) ease. China started trading again today, the first day of trading for the Year of the Dragon. China is now hesitant with their triple R easing measures; five are projected over the next ten months, about one, probably a 50 basis point lowering each time, every two months. China is concerned over the creation of asset bubbles due to the fast easy money pumping.

In the States, QE2 in late summer 2010 resulted in a commodities bubble that peaked in 2011. Quantitative easing pumps the commodities, copper, gold, silver, oil and equities higher. China probably became concerned over the action thus far in January, simply look at copper, sky rocketing as traders front run the triple R easings that are anticipated.  Thus, on this China news, futures turned red Sunday evening and remain red into the open today.  If China is not willing to supply the punch bowl, then traders may as well book profits and run for the exits.  China banks were weak overnight contributing to the 1.5% drop in the Shanghai Index.

The other news is Europe, the E.U. Summit meeting overshadowed by this continuing Greek drama.  The concern is real and palpable especially since Portugal yields continue to blow out signaling a need for a second bailout as soon as the Greece deal occurs.  As they say in Brooklyn, "Good luck wit dat."

The Fed last week excited markets to the upside but when traders had time to think about it was there rany real news? Is keeping rates low to late 2014 much of a difference as compared to mid 2013? It is all pie-in-the-sky worlds away from the present problems. Keystone does not know what he's having for lunch today let alone think about 2 or 3 years in the uncertain future. Chairman Bernanke also said further quantitative easing is on the table; why is that news worthy? Sounds like more of the same. Thus, when you view the Fed statement with a skeptic eye, the FOMC Emperor is not wearing any clothes.

Keystone commented last week that soul-searching was needed to assess all long positions.  A Bradley turn date occurred on Saturday indicating a potential market trend change is at hand so watch to see if the Thursday morning top holds.  The futures show the SPX down -0.67% while the Nasdaq futures are down -0.64%, somewhat in line.  The market rally has been led by tech.  The market bears will only be able to accelerate the downside if the Nasdaq leads the way down, at this juncture this morning, Nasdaq is not leading the weakness so the downside may be muted.

Watch UTIL 453 today and all week long.  At the open this number is uber important.  If UTIL stays under 453 the broad markets will continue to experience weakness. If UTIL moves above 453, the market bulls plan on taking markets another leg skyward.  In fact, the utilities, UTIL, must remain above the 451-453 area for the next month, every day, otherwise, the broad indexes will maintain steady bearishness, and the week starts at 449, already under these critical levels.

Watch SPX:VIX ratio 68 level. If that fails at the open the broad indexes will experience a strong down day, Dow Industrials likely down triple digits, as long as it stays under 68.  If the ratio stays above 68, it starts at 71 this morning, the bulls will not be concerned about any market down move today. If 68 is lost, bulls will be plenty worried. After the close today, check to see if the SPXA150R fell under 80 (favoring bears), or not.

For the SPX today, starting at 1316, the weak futures hint that  a drop of about 8 spoo's are in order, so that would target 1308.  SPX 1307-1308 is strong support.  If price drops under 1311-1312 at the open, that will accelerate the move lower to take a stab at that 1307-1308 support. Support below is 1314, 1311-1312, 1307-1308 and 1295. Note the importance of the 1307-1308 support since failure results in a likely drop of over ten more handles. Thus, high drama on tap this morning.

For the market bulls, they need to push the SPX upwards to touch 1320 to set off accelerated upside but the futures, and the tone of the market, as well as the new developments with China's approach to the tirple R easing, makes this outcome less probable today.  A move thru SPX 1313-1319 is sideways action today. Thus, in a nutshell, UTIL 453, SPX:VIX 68, and SPX 1311-1312 support and 1307-1308 support will dictate broad market direction today.

Note Added 1/30/12 at 8:51 AM: Merkel (Germany) making statements that the Greece talks need further discussions, futures took the additonal leg south. A loss of the 1307-1308 support appears on tap, look for a back kiss, then a move towards 1295, but, the Nasdaq is not yet leading the down side so the move lower may be limited.