Keystone's Morning Wake-Up 7/26/12

Today's installment of the popular daily soap opera drama, As the Markets Churn, begins with wild pre-market action.  The S&P futures were deteriorating from 4 AM EST thru 5 AM, dropping thru the flat line, then down two, then down four, down five, you get the idea, a solid negative tone was developing, then, voila, at 6:15 AM EST, Draghi says that he will do everything possible to support the euro. This means, stimulus, quantitative easing, lower rates, that type of thing.  Markets catapult higher, the S&P's jumping eleven handles in only a few minutes time. S&P's are up from 14 to 17 as this missive is written. The 10-year yield bounced from 1.39% to 1.43% on the news. The euro bounces.  Euro up = dollar down = commodties up = gold up = equities up.

If you are a conspiracy theorist, you are receiving lots of ammunition this week.  On Tuesday afternoon the markets were rolling over into the close when John Hilsenrath of the WSJ, thought to be a mouthpiece for the Fed, released an article saying the Fed was open to more easing at the 8/1/12 meeting or September, which caused markets to recover, and place the low for the week thus far.  This morning, just as the markets were rolling over once again, Draghi stick saves the shaky house of cards this time.  No wonder Ma and Pa wants nothing to do with the stock market; it is simply a casino that goes up if talk of quantitative easing occurs, or goes down if the talk abates.  Even the main stream press is coming up to speed with this circus; Stephen Roach referring to Fed stimulus as 'crack' as Keystone has lamented on this site for quite some time.

The dates to watch are the Fed meeting next Tuesday and Wednesday with the decison day on 8/1/12 where Chairman Bernanke will announce his new stimulus measures, most likely an extension of low rates into 2015 from the ongoing status where rates are to be maintained at current levels thru 2014. Next Wednesday will supply strong clarity for markets since the next Fed meeting will not occur until September.  In light of Draghi stepping on center stage this morning, the ECB rate decision on Thursday 8/2/12 will take on equal importance as the Fed meeting.  Draghi promised a pony this morning and is receiving a fifteen handle S&P pop for his jawboning, so he had better shop for a pony today and deliver that four-legged prize on 8/2/12. Note the kissin' cousins, Bernanke on 8/1/12 in the afternoon, and only a few hours later, Draghi on Thursday, 8/2/12, ahead of the U.S. opening bell. Do you think these two central bank conspirators are talking on the telephone coordinating their stimulus measures? Do you think they have coordinated the moves this week, with the Fed stick save on Tuesday afternoon and the ECB stick save this morning?

Thus, clear your calendar for next Wednesday and Thursday which may prove to be the most important two days of trading this year.  ZNGA laid an egg last evening so that does not provide enthusiasm for FB earnings due out today.  XOM initially announced blow out earnings this morning but upon closer inspection, after removing the smoke and mirrors, the EPS actually misses resulting in a one percent drop in pre-market trading. UTX is flat pre-market after its earnings release.  XOM and UTX are Dow Industrials components.  Keystone's SPX:VIX ratio punched above 68 yesterday which nullified the downward action so watch the ratio closely today to see if it continues to favor the top side of 68, or not. Watch the SPX 30-minute chart to see if the 8 MA moves above the 34 MA, and stays that way, or not, as described in this mornings chart work.  Watch the SPX 60-minute chart to see if price moves above the 200 EMA at 1346.30. If so, that signals bullish days ahead.

Watch RTH 41.90, if it is taken out to the upside, the bulls are mounting an upside rally.  Watch SOX 374, if it is taken out to the upside, the bulls are gaining strength, likewise if JJC 44.20 occurs, or XLF 14.45, or NYA 7753, or if the VIX drops under 18.70.  These parameters will dictate market direction.  The markets appear to be on fire this morning after Draghi's comments.  If three of the six parameters just listed jump to the bull camp, Keystone's proprietary algo, Keybot the Quant, will likely flip to the long side.  The Draghi news is just what the market bulls ordered and the short-covering is launching the markets. This type of action shows why it is important to stay hedged with fingers in both sides of the pie, long and short.