Market Internals

Introduction

This weekend's G20 meeting in Mexico "was full of gloom," according to an Associated Press article by Mark Stevenson. Two topics dominated headlines coming out of that meeting: Iran sanctions and OECD head Angel Gurria's warning that European stabilization might eventually require triple the $500 billion euros currently committed. German officials spluttered their outrage, with a German parliament testing vote due this morning. With some justification, German officials worried that throwing good money after bad might not solve anything. CNBC reported that Germany's Interior Minister, Hans-Peter Friedrich, asserted that Greece should withdraw from the Eurozone.

Other G20 participants insisted that Germany stop opposing a bigger EU bailout fund if they wanted other countries to contribute more to the IMF's crisis fund. A Reuters article by Gernot Heller and Glenn Somerville described Germany as "isolated" during the G20 meeting. It's doubtful that the U.S. will be contributing more money to that IMF fund this year, no matter what steps Germany or the rest of Europe takes.

Meanwhile, a draft law meant to recapitalize banks was submitted to the Greek parliament over the weekend and expected to be voted on tomorrow. Other market forces contributed to the early gloom. CNBC's Phil LeBeau appeared on the Sunday night national news to talk about rising gasoline prices.

The gloomy news depressed U.S. futures Sunday evening. By Monday morning, with headlines proclaiming surging oil prices, the World Bank warning China to reform the economy "or face collapse" (CNNMoney), and new EU sanctions considered against Syria's regime, the gloom had deepened. Even Warren Buffet's assertion in an interview with CNBC's Becky Quick that rising oil rises would not derail a U.S. recovery did not immediately reassure U.S. futures traders who were watching European bourses trading lower.

Lowe's (LOW) shook off the gloom in pre-market trading. The company followed competitor Home Depot by reporting fourth-quarter sales growth well ahead of predictions. Excluding items, the company's earnings met expectations of 24 cents a share. Unseasonably warm weather contributed to the better-than-expected sales as homeowners tackled projects much earlier than they normally would.

Markets often reverse or accelerate their early moves about thirty minutes into trading. The first reaction has played out and market participants get a look at economic releases or listen to conference calls from reporting companies. Pending Home Sales and other events proved to be the catalyst for a hard reversal that began in the second half hour of the day. Warren Buffet had already attempted to boost home sales before the release. In an appearance on CNBC, he claimed he that he "would buy up millions" of single family homes if such a task were practical. Economists had forecast a rise of 1.1 percent after the previous drop of 3.5 percent, but market participants were soon to find out that prediction wasn't nearly sunny enough. Sales rose 2.0 percent.

The bad-weather warnings of all types seemingly disappeared in an instant. The SPX rebounded from a low of 1,354.92 up to 1,369.14 before it even paused the first time. By the end of the day, however, most indices had just been blown from one side of a channel I watch on my intraday charts to the opposite side of that same channel. Let's see what the action looks like on daily charts and then we'll look at some intraday ones.

For those of you not used to my charts, you may see a lot of confusing lines. I tend to look at possible targets both to the upside and downside, areas where we might need to defend our trades in the coming hours and days. I might have some idea where I think prices should go, but what's important is where they might go, in either direction.

Charts

Most indices produced small-bodied candles on Monday, with such candles indicative of indecision. However, charts showed some differences in setups, indicating indecision in this manner, too. The SPX's daily candle, for example, again bounced from a test of a still-rising moving average.

The SPX inched up to another new closing high, but managed only a 0.14 percent gain for the day.

Annotated Daily Chart of the SPX:

We can all think that the rally is overdone, overbought, irrational and due for a pullback. I certainly do at times. However, we can easily see by looking at something as simple as the rising 9-ema that no change in tenor has occurred as yet. With the volatility indices as low as they are now, I would counsel against leaning heavily into negative-vega trades that would be hurt by a sharp increase in volatility, such as is often seen in a sharp downturn. The probabilities suggest that there's more danger now of that happening than of the volatility decreasing much more or for much longer, but tell that to anyone who traded through the mid 2000's, when volatility indices stayed in the cellar for a long while. Still, I am all about containing risk. Bears need to realize that the tenor has not changed yet. Bulls need to realize that they can't plow too heavily into trades that have worked well in the market environment that's prevailed over the last few months. If you're in a monthly trade, I would be prepared for a trip up to 1432-1435 or down to 1318 or, perhaps even 1280. That doesn't mean that either of those levels will be reached, and the charts currently don't give a strong hint of which one has the highest probability. The risk is that one of those will be reached. Are your trades going to be okay if that happens or can you adjust them if it does?

The Dow Jones Industrials has also been climbing the daily 9-ema, closing above it on most daily closes. The 9-ema still rises. Yet, the Dow looks a bit weaker on that chart than the SPX, and it saw an end-of-day sharp decline that brought it back below 13,000.

Annotated Daily Chart of the Dow:

The NDX hit another new closing high today.

Annotated Daily Chart of the NDX:

The RUT's daily chart has set up differently than some of the others. The RUT's 9-ema flattened over the last two weeks. The RUT has been trading back and forth across that average both intraday and on closes. Until the RUT breaks out of that rectangular formation in which it's been trading, by consistent daily closes above about 837.80-838 or below about 811.40-810.50, none of these swings through that channel can tell us much about next direction. On an upside breakout, a potential eventual target near 886 is set, and, on a downside breakdown, a potential first target is set near 795, although we should all be prepared for bounce potential at 800, of course.

Annotated Daily Chart of the RUT:

The RUT's candle shape and position suggest that it's slightly more likely to dip to test support at the first red oval rather than rise to test resistance at the first green one. However, that suggestion is so slight that it shouldn't be given too much credence. In essence, the RUT just churned around within a rectangular consolidation band in which it's been churning. We can't derive any more information than that. It's how the RUT behaves on consistent daily closes at those resistance and support levels, when tested, that will give us stronger clues. Note that those potential targets also can serve as support or resistance on daily closes, too.

With the current setup in intramarket relationships, what happens with the equities may depend on what happens with the dollar. Although the relationship doesn't always hold true and I suspect it will not in the future, currently our equities tend to do best when the dollar declines.

Annotated Daily Chart of the Dollar:

This chart's setup shows that it's going to require either some kind of upside jolt to the dollar's price or else some time elapsed to break through that resistance that appears to be gathering just overhead. A jolt can occur, of course, particularly with Greece's parliamentary vote and other decisions being made across Europe and important economic developments here such as the GDP, Chicago PMI, the Fed Chairman Ben Bernanke's speech and the Beige Book on Wednesday. It might be wise to watch the /DX contract over the next few days, and be particularly on the alert if it either drops toward reversal territory near 77.50 or jumps above that mass of resistance levels at the yellow oval.

Monday's Developments

After hours, Priceline (PCLN) added to its closing highs after reporting $226 million or $4.41 a share, up from the year-ago level of $135.7 million or $2.66 a share.

One big newsmaker was the decline in crude. Jim Brown covered the crude market in great detail in the weekend Wrap, and I suggest you review that Wrap if you haven't read it already.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic releases include several premarket items: the ICSC-Goldman Store Sales at 7:45 AM ET, Durable Goods at 8:30 AM ET, and the S&P/CS Composite-20 HPI, year over year. Durable Goods will like draw the most attention among those two. Expectations are for a drop of 0.6 percent, after the prior month's 3.0 percent gain.

We'll have to watch again tomorrow for the possibility that the first market reaction after the open might be stalled or accelerated by releases that appear about 30 minutes later. Those include the Redbook chain store figures, CB Consumer Confidence, Richmond Manufacturing Index and a State Street Investor Confidence Index. Consumer Confidence at 10:00 AM ET could be one of those stall-or-accelerate numbers. Expectations are for a rise to 63.2 from the prior 61.1. Later in the morning, a 4-Week Bill auction rounds up the morning's events, with that occurring at 11:30 AM ET.

What about Tomorrow?

We've looked at the daily charts, but what do the intraday charts suggest for early tomorrow? Remember that news- or emotion-driven markets such as ours can result in futures being run so far that indices gap and run for a while before the euphoria or despair wanes. In those cases, short-term support or resistance levels from the previous evening may mean little. When I look at these charts, I again tend to think of which developments will be meaningful in setting new targets and what those mean for the risk I'm assuming in my trades. I don't tend to think that the price is going to definitely go any one direction but what the risks will be in both directions. Anyone who thought she knew enough about technical analysis to predict the next move got taught a thing or two over the last few years when gapping indices became common. Still, technical analysis proves useful because it helps us set up if/then kind of scenarios by which we can govern our trading and manage our risks.

Annotated 30-Minute Chart of the SPX:

Annotated 30-Minute Chart of the Dow:

Annotated 30-Minute Chart of the NDX:

Annotated 30-Minute Chart of the Russell 2000:

What's the conclusion? Nothing really got decided today. The SPX, Dow and NDX continued bouncing happily from their 9-ema's. The RUT stayed in its rectangular consolidation pattern. I could point to bearish divergences on some charts or mention the volume patterns. I could expound upon likely EU or IMF decisions, but then I'd have to expound on whether we'd have a sell-the-fact or buy-the-fact reaction, and my ideas about that are likely no better than yours. The truth is that we didn't see anything change today. It's my personal belief that when markets are charging higher and volatility indices are dipping dangerously low, you don't want to weigh in too heavily with trades that will be hurt by a sharp downturn or a sharp rise in volatility. Does that mean that I don't trade or have sold everything? Does it mean that I'm loading up with bearish trades? No. It means that I figure out how much risk I want to take on in this environment, how I might hedge risk if x value or y value was reached, and act accordingly. You've seen some possible targets. What would happen to your trades if they're hit? If they're hit slowly or hit by a rabid two-day market move, would that make a difference in your trade or your willingness to be in it? You have control over what you trade and when you trade. Right now, take a look at your risk.