Market Internals

Introduction

U.S. market participants might have preferred economic releases that would refocus attention away from Asia and Europe. We had none. Instead, events in Asia and Europe jerked the puppet strings, sending U.S. equities lower.

In Asia, the Nikkei 225 had held up fairly well, closing down only 0.20 percent, but the Hang Seng and Straits Times had closed lower by 1.84 and 1.07 percent, respectively. European bourses had lost higher percentages by the time most U.S. market watchers were waking. U.S. futures suffered, pressured lower, too.

Many developments contributed to the decline in Europe. Those who might have hoped for an equity boost from the increased pledges to the International Monetary Fund this weekend were to be disappointed. Spain's central bank announced today that the country had again met the technical qualifications a recession. Its first-quarter economic output decreased by 0.4 percent, the second quarterly decrease in a row.

Sunday's French election added extra tension. Most discussions had focused on incumbent Nicolas Sarkozy and Socialist frontrunner Francois Hollande in this first-run vote. However, a far-right candidate a Reuters article termed "anti-immigration" shook things up. Hollande came in first and President Sarkozy, second, but the far-right candidate turned in an unexpectedly strong performance. Those results rendered the outcome of the May 6th second-round voting even more uncertain.

Hollande's first-place standing, although widely anticipated, adds ambiguity to the Eurozone situation. Hollande wants the ECB's mandate to include a mandate for growth, and he wants that condition included in any EU treaty agreement. As if that weren't enough to heighten uncertainty, a collapse of a coalition government in Netherland added further uncertainty. The coalition had been trying to push the Dutch budget deficit below 3 percent of the GDP.

Also in Europe, both the German and Eurozone Flash Manufacturing PMI's disappointed. Germany's had been expected to climb to 49.0 from the previous 48.4. Instead it dropped to 46.3. The Eurozone had been expected to climb to 46.0 from the previous 47.7, but instead it dropped to 46.0. By their close, the FTSE 100 had lost 1.85 percent; the DAX, 3.36 percent; and the CAC 40, 2.83 percent.

Monday's Developments

Our indices ended the day lower, although well off the day's lows. The Dow put in another triple-digit day, with today's version a triple-digit decline.

Story stocks included Nestle SA, reporting that it will buy Pfizer Inc.'s (PFE) infant nutrition business. The deal requires regulatory approval. PFE ended the day at $22.39, down $0.17 or 0.75 percent.

Wal-Mart Stores, Inc. (WMT, 59.52, -2.93 or 4.69 percent) would have preferred not being among the story stocks today. News all weekend centered on the company's intention to investigate assertions of corruption by employees of a Mexican subsidiary. Worse, when the New York Times broke the story this weekend, it alleged that U.S. executives had previously shut down efforts to investigate charges. Allegedly, WMT wanted the stores built out quickly and systematically paid bribes to meet that goal then later buried the story after a short initial investigation.

Kelloggs (K, 50.69, -3.29 or 6.09 percent) probably would have preferred not numbering among the story stocks, either. The company lowered fiscal year 2012 guidance after the Q1 performance proved weaker than expected. The company also issued lowered Q1 guidance, citing weakness in volume growth in certain U.S. categories and European business. However, the company also attributed the lowered guidance to the company's interest in investing in future growth.

AstraZeneca (AZN, 45.54, -0.68 or 1.47 percent) and Ardea Biosciences (RDEA, 31.62, +10.78 or 51.73 percent) will merge, with AZN acquiring RDEA. RDEA will be acquired for $32 per share, with RDEA having closed at $20.84 on Friday.

Reporting companies included COP (72.33, -0.55 or 0.75 percent). The company reported Q1 earnings of $2.02 per share, excluding non-recurring items. It had been expected to report $2.06 per share. The company reported higher marketing margins. Those higher margins, together with higher commodity prices, offset lower production volumes and refining margins.

Phillips Electronics (PHG, 19.44, +0.65 or 3.46 percent) reported better-than-expected Q1 earnings and announced that it had finalized its TV joint venture with TPV. The company remained cautious due to a slowing growth in the global economy and uncertainties in Europe.

Xerox (XRX, 7.88, +0.01 or 0.13 percent) beat expectations by one cent. The company issued in-line Q2 guidance and guided expectations for the fiscal year to $1.12-1.18 versus a prior consensus of $1.12.

Brinker International (EAT, 30.88, +2.98 or 10.68 percent), the owner of Chili's and Maggiano's restaurants, reported increased traffic at some restaurants. The company earned an adjusted $48 million or $0.60 per share on revenue of $742 million, against expectations of $0.56 per share on revenue of $730.8 million. Revenue on restaurants open at least a year increased 4.2 percent for Chili's and 3.9 percent at Maggiano's locations.

Power Management company Eaton Corp (ETN, 47.40, -0.04 or 0.08 percent) reported adjusted net income of $0.92 a share against expectations of $0.90 per share. Revenue rose to $3.96B, but one source said analysts had predicted $4.01B.

Facebook announced that Q1 revenue climbed to $1.058 billion from the year-ago $731 million, with a leap in average monthly active users to 901 million from the year-go 680 million. That's the headlines, but net income fell to $205 million from $233 million.

In after-hours trading, Illumina (ILMN, 43.90, -0.46 or 1.04 percent) had run up $0.73 or 1.66 from its closing price, to trade at $44.63 in after-hours trading as this report was prepared. The company reported, also announcing a $250M share repurchase program. Revenue was $273 million, down from the year-ago $283 million. GAAP net income was $26 million or $0.20 per diluted share, compared to the year-ago level of $24 million or $0.16 per diluted share. The company mentioned some uncertainty "with respect to academic and research funding in the second half of the year" but said that their "full-year outlook is generally as we anticipated." They reaffirmed 2012 guidance. The conference call had not begun as this report was prepared.

Netflix, Inc. (NFLX) was cascading down and was at $88.00, down $13.84 from the $101.84 close in after-hours trading, as these words were typed. The company reported a loss of $0.08 a share on revenue of $870 million. These reports appeared to be better than anticipated. The company also reported 23.41 million domestic streaming subscribers, near the high end of the 22.8 million to 23.6 million range the company had told investors to expect. The company announced that it might move into the black sooner than expected, and may even turn a profit in Q2 rather than losing money through 2012. Still, investors obviously did not like the report on initial inspection. One market watcher suggested it might be the net adds for the second quarter.

TXN rebounded after its after-the-close earnings report. As this was typed, it was $32.67 or up $0.78 from its $31.89 close. The company emphasized that although "the business cycle bottomed in the first quarter," they had anticipated that happening and were pleased when "early signs of growth began to emerge." They saw a pleasing "breadth of increased orders across geographical regions and markets, including the industrial sector." The company reported profit of $0.32 a share on revenue of $3.12B, with expectations pegged at $0.29 a share and $3.06B. The company gave guidance of $0.36-0.44 a share, about in line with previous expectations of $0.40 a share.

Also in after-hours developments, Big Lots (BIG) warned. Same-store sales would be "slightly negative," the company reported. Previous expectations had been for a rise of 2-4 percent. Sales softened late in the quarter. BIG had ended the day at $45.71, down $0.16 or 0.35 percent, but as this report was prepared, it was at $39.01, down $6.70 or 14.66 percent from the close.

Let's look at charts.

Charts

The SPX still chops out a consolidation zone. It still looks vulnerable to a drop to 1330-1335 but could just as easily jump to 1405-1415.

Annotated Daily Chart of the SPX:

A couple of weeks ago, charts began predicting that the SPX and some other indices could chop around in a noisy congestion zone for two or three weeks before we knew the next direction. The SPX and some other indices have indeed been chopping out a congestion zone. Timing can be nearly impossible to predict, but the SPX could chop around another week or so or could break out any time, and that is true of the other indices, too. The formation, unfortunately, is not a bullish one, but as long as support currently being tested holds, it has not been confirmed.

The SPX has formed one or two daily closes at or above the 9-ema but hasn't been able to form consistent daily closes above it. It has chopped back and forth across nearby upside resistance and nearby downside support, rendering them useless as markers of next direction. A breakout above the 4/17 high of 1392.76 or a breakdown below about 1354.50 that isn't reversed within a few hours sets up potential downside and upside targets at the next green and red ovals. Between those levels, it's all noise.

If those resistance or support levels at the ovals are hit, watch for the possibility that they will hold as either support or resistance. Plan your trades accordingly. I don't know whether the SPX will attempt a breakout one direction or the other this week, but it could happen any time now and we have a number of possible triggers this week. Consistent daily closes above the recent high of 1422.38 or below the 1330 level then set up the next potential targets illustrated on the charts. In my own trades, I'm most worried about the possibility of a strong decline, but that doesn't mean I'm leaning my trades too far that way. I make sure that I have them positioned so that they won't be hurt too badly by a strong rally, either.

As with the SPX's chart, the Dow's chart setup hasn't changed much from last week's.

Annotated Daily Chart of the Dow:

Also similar to the SPX, the Dow has chopped back and forth so much across the daily 9-ema and 45-ema's that it's rendered them useless for predicting direction. A breakout above the 4/17 high of 13131.36 that isn't reversed within a few hours sets up potential upside targets at the gray channel boundaries and then at the green oval. A breakdown below the lower gray channel boundary that isn't reversed within a few hours sets up a potential target at the first red oval. Watch for potential resistance or support at each of these levels, if tested, and plan accordingly. My comments about the SPX hold here, too: the chart doesn't promise that a breakout attempt either direction will occur this week, but such an attempt could come at any time now.

Last week, the NDX spent the week producing daily closes beneath the nearest strong resistance and above the nearest strong support in an ever-tightening formation. By week's end, it looked as if time were drawing near for it to break out one direction or the other. Today's gap broke the NDX beneath that support.

Annotated Daily Chart of the NDX:

The NDX's chart formation has somewhat diverged from the SPX's and Dow's, but its breakdown alerts market watchers that the other indices could also break beneath their nearby support levels, too. "Breakdown" should be spoken with tongue in cheek, however, since the NDX promptly started moving back toward a retest of the breakdown level, and a single candle below that level should not be considered firm confirmation. We know, moreover, that AAPL has been the puppeteer pulling the strings of the NDX and some other indices, too, and it's due to report tomorrow. When I talk about consistent daily closes above or below certain key levels, it's because a one-day violation, unless a large one, may not be strongly predictive of next direction.

A disappointment in AAPL could drive the NDX down toward next historical support near 2600 or even deeper, to the red oval on the chart. Cheering news from AAPL could send the NDX back up to retest the 2670-2695 zone, where it's possible that former support might now be converted to resistance on daily closes. If the NDX can make it past the 9-ema on consistent daily closes, then it sets a potential next target near 2755-2775. I wouldn't be surprised to see either 2600 or 2755 sometime over the next two weeks. Those with far more money than I'll ever have will allow or engineer a test one of these days to determine whether weak hands will bail or bulls will jump on any first sign of a bounce and hang on.

The RUT still chops between potentially strongly support and potentially strong resistance.

Annotated Daily Chart of the RUT:

The RUT coils. Anything between the 4/17 high of 816.32 and the 4/10 low of 783.56 is just noise, and I personally would extend that lower boundary down to about 769-773 and the upper boundary up to about 821-822. If the RUT breaks out of either of those chop zones on consistent daily closes, new potential targets are set at the next green and red ovals.

Watch for the potential for the RUT to reverse course near the 769-773 or 816-821 zones if they are hit. If they're instead violated on consistent daily closes, look to the next red or green ovals as the next potential target. Although the Keltner channel system illustrated here sets up a much lower target for the RUT if nearby support is violated, we should also respect historical or Fibonacci potential support zones near 750 and 725 if the RUT should dive hard. Other market participants will certainly be watching those levels and might be willing to step back in if those levels are hit. I include the Keltner boundaries even though they might seem far-fetched because I've been surprised by how accurate they can sometimes be. This isn't a scare tactic or a solemn assertion that the lower boundary will be hit if the RUT drops below 769 on consistent daily closes. It's just a planning tool to prompt you to ask yourself some what-if questions.

In the recent past, our equities and commodity prices have tended to move in opposition to the dollar, but that dollar/equities relationship sometimes shifts. It has shifted a bit the last two weeks with both the dollar and equities trending down toward support. The dollar may be strongly impacted by the outcome of European bond sales as well as by our FOMC's decision.

Relationships that haven't shifted are the relationships in the behaviors of the BIX, a financial index, and the RLX, the retail index, and that of our equity indices. The equities have tended to move in concert with these two. I didn't think we'd see a meaningful pullback in our major equity indices as long as the BIX and RLX were still blazing upward. They were functioning like a wind sock for the other indices. The RLX was one of the last indices to stall, and I'm still watching it as my indicator index.

Annotated Daily Chart of the RLX:

Support at the lower boundary of the price channel now converges with Keltner and round-number support near 600. If the RLX bounces hard from that support, it may carry some indices up with it again or at least serve as confirmation of their short-term bounces. I would watch for rollover potential again at the top of that channel if it's hit. If the RUT breaks down through the channel's support, that would confirm or perhaps predict weakness in other indices.

Tomorrow's Economic and Earnings Releases

The recount of important events for tomorrow would not be complete without mentioning that Spain sells 3- and 6-month bills tomorrow. Yields on Spanish bonds have lately functioned like the strings on a puppet, jerking our equities one direction or another. I could not locate a time for that auction.

Tomorrow begins the two-day FOMC meeting here in the U.S. Market participants will begin positioning their trades ahead of that meeting, their efforts perhaps attended by lower volumes and higher implied volatilities. We've seen chart setups that would fit with continued consolidation into the middle of this week or even next week. However, they've continued long enough now that they might reasonably break one direction or the other at any time. A post-FOMC reaction would be an ideal time to see that happen.

Tomorrow's monthly and year-over-year releases start with the S&P/CS Composition-20 HPI at 9:00 am ET. This number measures the change in the selling price of single-family homes in 20 metropolitan areas. Analysts predict that this number will drop 3.5 percent, with the prior number dropping 3.8 percent.

At 10:00, the Conference Board releases its Consumer Confidence number, with experts chiming in with a 70.1 expectation for this important number. That's down slightly from the prior 70.2. During the same time slot, the Census Bureau releases new home sales. Market watchers expect those to number 321K, up from the prior 313K. Two of the last three releases missed expectations, and those hoping for strength in the markets don't want to see a repeat.

The day's releases won't stop there. During that same 10:00 am ET time slot, the FHFA releases its number measuring the change in the purchase price of homes with mortgages that Fannie Mae and Freddie Mac back. Market watchers expect that number to climb 0.1 percent after a flat number at the prior report. In with all the other releases crowding this time slot, the Federal Reserve Bank of Richmond releases its Manufacturing Index. This is supposed to be pegged at 7 again, the same number as the prior release.

Of course, the normal Weekly Chain Store Sales will be released at 7:45 am.

Companies reporting earnings tomorrow include AMGN (AMC), AAPL, AKS (BMO), CHRW (AMC), FTI (AMC), JNPR (AMC), LXK, MMM (BMO), PNRA (AMC), and UTX (BMO).

What about Tomorrow?

As usual in my Monday articles, I'll show intraday charts for some of the major indices, but I have a caveat for this week. The indices are in congestion zones. In addition, we're moving into that pre-FOMC period. Both conditions render intraday charts less useful for predicting next market direction.

I'm using 60-minute charts in tonight's Wrap to try to filter out at least some of the intraday noise. The SPX overran a lower channel boundary this morning but then reclaimed it and rose to test the 9-ema on the hourly chart.

Annotated 60-Minute Chart of the SPX:

As the chart makes apparent, potential resistance and support has been strung out all across this chart due to the whippy intraday action of the SPX. That action renders it nearly impossible to make judgments about whether support or resistance looks strongest. It is notable that despite a couple of hours of challenging the 9-ema, the SPX still could not breach its resistance on 60-minute closes. We have to presume that the SPX remains vulnerable to another pullback, although the chart setup doesn't allow us to ascertain whether such a pullback is a probability or just a possibility. Potential support may be coalescing near 1361-1364. That's support that could make it easier for the SPX to climb than to decline, but again it's impossible to tell whether that's spongy or strong support. A few more hours' trading may clarify the situation, but for now, a drop to test that 1357.38 low visible on the left-hand side of the chart looks to have about equal probability as a climb toward about 1374-1377.

The Dow's chart shows a little more coherence to the Keltner levels.

Annotated 60-Minute Chart of the Dow:

The Dow fell to potentially strong support on 60-minute closes and bounced from that support. It also tested its 9-ema, but couldn't sustain 60-minute closes above it. It looks vulnerable to a pullback to the day's low, but a rally tomorrow morning that gaps the Dow above that 9-ema and then runs it up to about 12986 in early trading looks about equally possible.

If the nearest targets are met and exceeded on either the upside or downside, the next ones are marked on the chart, too. It's no surprise that the 13000 level looks like potentially strong resistance if it is tested or that 12713 level looks like potentially strong support if it is tested. Both levels coincide with recent highs or lows, trendlines that could be drawn, and other more standard technical analysis tools.

Several checked sources did not include a specific time for AAPL's earnings announcement, but if it's before the market open, that announcement could render everything shown on the NDX chart below useless.

Annotated 60-Minute Chart of the NDX:

Like the Dow, the NDX dipped all the way to the lower target on the nested Keltner channel setup I use. Like the SPX and Dow, the NDX rose to test its 9-ema, but as was true of both, it could not surmount that resistance despite holding there for a couple of hours. The NDX looks vulnerable to a pullback to test today's low, but if AAPL's report or some other propellant gaps the NDX above its 9-ema tomorrow morning at the open, it's more likely to attempt to rise toward the first or even the second of the green oval targets. The next potential upside targets are marked on the chart, but the daily charts will be needed for a potential downside target if today's low is violated on 60-minute closes.

Like the Dow and NDX, the RUT fell to its lower target this morning and then, as did all the indices shown, it charged up to test its 9-ema.

Annotated 60-Minute Chart of the Russell 2000:

The RUT's chart setup looks as if support may be attempting to converge near 788-789, but the convergence isn't yet strong enough that it's possible to assess whether it is spongy or will prevent a retest of today's low. A morning gap tomorrow morning up above the 9-ema might set up a potential retest of the 798-801 zone. There, historical and round-number resistance might converge to prevent a higher drive up toward the bottom of the channel that the RUT fell through this morning. None of these setups is strong enough to attach any strong trustworthiness to them. Violations of the nearest potential target zones on 60-minute closes set up new potential targets, but to find a new target if the lower boundary is violated on 60-minute closes, look back to the daily chart.

Tomorrow may be more about positioning ahead of the FOMC announcement and AAPL's earnings than any predictive market move. If markets coil into ever tighter formations ahead of the FOMC announcement, the zigzags might not mean much. Implied volatilities may hike, rendering options expensive, while volume shrinks. Market participants may find it difficult to predict post-announcement directions, no matter what their chart-reading capabilities.

Markets have begun to look vulnerable to a downdraft. Today's decline across many indices still looks like part of a setup to a potential downdraft, not the downdraft itself. However, any mention of QEIII or a Twist extension could prompt a knee-jerk rally instead. Furthermore, a post-earnings rally reaction to AAPL could also put a wrench in that theory. How do you deal with these possibilities ahead of time? If you're a newbie day or weeklies trader, consider standing aside. This might be the week when you want to test out a simulated trade instead of a live one or cut down the size of your day and weeklies trades. Traders in the longer trades have to decide ahead of time how they'll deal with the likely increased volatility before, during or after the announcement. Hedging may be expensive or require spreads instead of single options. Be aware that it's not always easy to exit any complex trade, including verticals or spreads, in a fast-moving market. Some traders will opt to widen stops if that is appropriate for their trades, planning to let any wide vacillations post-FOMC decision on Wednesday tamp down before they reposition their trade. Others will tighten stops. Decide ahead of time what you'll do. In the frenzy of a big market reaction, if one should occur, it's hard to make such decisions.

And then, if you do all that preparation, the markets are guaranteed to coil another week without any big movement at all. Isn't that the way it always works?