Market Internals

The NDX did not see the same last-minute pop in prices. At the end of the day, it was being squeezed between converging support and resistance. Nearest support and resistance on 30-minute closes lay at about 2720 on the downside and the 9-ema on the upside, although I would extend upside resistance up to about 2730. If 2720 and 2730 are broken on consistent 30-minute closes, look to the next marked levels as potential targets and also as potential support and/or resistance levels. As with the other indices, if support or resistance holds, look to the opposite next marked level for a next potential target.

Introduction

An AP article appearing in this weekend's Austin American Statesman explained the origins of the "go away in May" adage and then poked holes in it ("Poking holes in old 'Sell in May' adage, Bernard Condon). Condon explained that the adage originated from the British. The advice to "sell in May" originally continued with the admonition to "come back on St. Leger's Day." In the 1930's, a famous horse race was run in September on St. Leger's Day.

Condon quarreled with several aspects of the adage. One concern was that when six different start dates were tested, the practice beat a buy-and-hold strategy for three of those start dates and failed for three. The six start dates tested were 1950, 1960, 1970, 1980, 1990 and 2000.

Whether we believe the adage or not, most of us options traders are not as concerned with the calculated results as we are with what's going to happen to our open trades over the next few weeks. We have to consider what may happen as the calendar turns and developments in Europe, including France's second-round elections this weekend, loom. We know how strongly developments in Europe impact our markets when bond auctions in Europe start showing up on our economic calendars, as they began doing this last week.

Overnight, European markets opened near the flat line or higher, in the case of the FTSE 100, but then trended lower into the mid-afternoon trading as our open approached. Spain's central bank had announced last Monday that the country had met the technical qualification for a recession, two quarters in a row of contracting GDP. Today, data confirmed that announcement, with real GDP contracting 0.3 percent for the first quarter. The FTSE 100 closed lower by 0.19 percent; the DAX, 0.59 percent; and the CAC 40, 1.64 percent.

Our futures were drifting lower, too, as our open approached.

Monday's Developments

Before the market open, the Bureau of Economic Analysis released the Core PCE Price Index. This index measures the change in the price of services and goods, excluding food and energy, that consumers purchase. Forecasters had predicted a gain of 0.2 percent. The index came in exactly as expected. The gains have vacillated between 0.0-0.2 for most of the last year, with the June 27, 2011 0.3-percent gain being the only exception.

During the same 8:30 am ET time slot, the Bureau of Economic Analysis also released Personal Spending, the change in the inflation-adjusted value of the expenditures consumers make. The same agency released Personal Income at the same time, with this being the change in the total value of all income consumers make from all sources.

Spending was expected to increase 0.4-0.5 percent, less than the previous 0.8-percent gain. Income was expected to gain 0.3 percent, more than the previous 0.2 percent. Spending increased only 0.3 percent, but the previous number was revised higher to 0.9 percent, a gain that a Bloomberg article tagged as the largest since August 2009. U.S. futures rebounded about the time these numbers were released. Perhaps that rebound was also due to the 0.4-percent gain in Personal Income and the revision of the prior number to an 0.3-percent gain.

Chicago PMI was next in line, with this number an important predictor of the Manufacturing ISM scheduled for tomorrow. Experts expected a Chicago PMI of 60.9, down from the prior 62.2.

The PMI disappointed, dropping to 56.2. That's the lowest number since November 2009, if I didn't miss anything when scanning the table of old reports. Bullet points from the report noted another 2009 comparison: production was the lowest level since September 2009. Other bullet points noted that inventories were lower in 6 of the last 7 months, supplier deliveries dropped to their lowest levels since September 2011, and prices paid moved lower from March's 7-month high. This decline in activity was the second in a row and drops the index below 60 after it spent five months above that level. On the positive side, order backlogs increased and the employment component rose to 58.7 from March's 56.3.

U.S. equities slid lower. The next report wasn't going to make equity investors any happier.

The Dallas Fed Manufacturing Survey typically attracts so little notice that it doesn't appear on one popular calendar for economic releases. It was unveiled at 10:30 AM, with the Dallas Fed characterizing the report as "mostly turning less positive or mildly negative." Texas factory activity increased in April, but it increased at a slower rate. The production rate measured 5.6, down from the prior 11.1. That same slowing was apparent in other components. The capacity utilization component slowed from 12.3 to 1.4, and the business activity index dropped into negative territory at -3.4.

The conclusion of the Dallas Fed was that the "Dallas report adds to the slowing message from the Chicago PMI posted earlier this morning. The economy is growing but less than hoped for." Before last week's FOMC meeting, such a statement might have pumped up QEIII hopes and precipitated a rally, but no such rally resulted this day.

Story stocks included Barnes & Noble (BKS, 20.75, +7.07). Microsoft (MSFT, $32.02, +0.04) announced that it will invest up to $300M to create a new Barnes & Noble digital subsidiary. This would give MSFT an approximate 17.6-percent stake in BKS. The new business will center on digital and college businesses. A new Nook application will be made available for Windows 8. The companies have not yet decided whether the business will be spun off into an entirely separate business.

A benefit to MSFT will be a presence in the e-book business, stepping into the space dominated by AMZN. The new subsidiary will have some kind of relationship with BKS retail stores, but the exact nature of that relationship hasn't yet been decided.

BKS has been under recent pressure to spin off various portions of its business, including the college business. The company recently turned down a larger offer from a major shareholder which would then have taken a 51 percent interest in the college bookstore unit and obligated the company to go public with that unit within a reasonable amount of time. BKS closed at $13.62 on Friday, already rising strongly Friday afternoon from its near-$10.00 open. Today, it closed at $20.75, although it's losing a little ground in after-hours trading as this is typed.

Amazon (AMZN, $231.90, +5.05) proved to be a story stock all on its own. The company and the state of Texas reached a sales tax agreement. Beginning July 1 this year, sooner than in some other states, AMZN will begin collecting and remitting sales Texas on items sold to Texas residents. State officials crowed in Austin newspapers this weekend about the coup that delivers monies into their coffers so quickly when other states' agreements postpone those payments for longer periods of times. In addition, AMZN promised it would create 2,500 new jobs in the sates and make at least $200 million in capital investments in the next four years.

Other story stocks included reporting companies. As Jim has mentioned in his weekend Wraps, these companies likely won't grab headlines and push the indices around the way AAPL, AMZN and C could when they reported. Before the market open, results were mixed, with Humana (HUM, $80.68, -7.14), LyondellBasel (LYB, $41.78, -3.95), and Tenneco (TEN, $30.83, -5.26) missing, according to one source, and Loews (L, $41.13, +0.12) and Watson Pharmaceuticals (WPI, $75.36, -0.80) beating. HUM continued dropping after the close. NYSE Euronext (NYX, $25.75, -1.32) blamed a failed merger on a 44 percent drop in Q1's net profit. That failed merger cost the company $31 million.

After the close, Anadarko Petroleum (APC, $73.21, -0.58) reported earnings of $0.92 a share, excluding one-time items, with predictions of $0.83 a share. Revenue was $3.45 billion against expectations of $3.39 billion. After the report, the stock climbed and was last at $73.97 as this report was prepared. McKesson's (MCK, $91.41, +0.36) headline revenue was $31.7 billion versus an expected $28.8 billion. A profit of $2.09 per share was measured against an expected $1.26 a share. After hours, the stock dropped and was last at $89.13 as this report was prepared. Also after hours, Shutterfly (SFLY) soared after reporting its results. As this report was prepared, the stock was up $3.77 in after-hours trading, to $34.93 from the $31.16 close.

Books-A-Million (BAMM, $3.19, +0.64) performed strongly. One source noted that Anderson Family suggested taking a 100 percent stake in public interest in the company.

At the end of the day, Coke (KO) squashed rumors that it would buy Monster Beverage (MSNT). The Wall Street Journal had reported that the two were in talks. KO said it continues "to review the best ways to maximize the value of our relationship." I don't know, although the statement was called a "definitive" denial of the rumors, I don't find it all that definitive yet.

Did today's retreat cause any harm? Let's look at charts.

Charts

For the last couple of weeks, the charts have been chopping out a congestion zone, showing adherence to a possible bearish interpretations of the chart. Still, charts had also suggested possible upside targets. Possible bearish interpretations or not, I've been hedging as needed against a possible upside move and urging others to do the same if price action required that step. I'm glad I did and hope you did, too. Those call debit spreads I bought came in handy in flattening upside profit-and-loss curves. Now we have to ascertain if the downside interpretation was nixed by last week's post-FOMC reaction.

The SPX did jump up toward the 1405-1415 potential upside target, one possibility mentioned last week. That possibility did not look like the strongest one, but the FOMC meeting was mentioned as being a possible precipitant for a move either direction. I tend to look both to the upside and downside for risks, wanting to know I can defend my trades if they hit upside targets or downside ones. Now that the SPX reached up to the bottom of that potential target mentioned last week, will it keep going or find resistance?

Annotated Daily Chart of the SPX:

Today's pullback doesn't give us that answer. This minor pullback so far did no damage to the next potential upside targets. That target zone's upper boundary now moves up to 1420-1426, where the rising bottom trendline of the SPX's former price channel now crosses. Remember that this trendline rises, so it will be higher later in the week if the SPX should continue rising and test it. That's a test that will tell us if the rally from last week has legs or was just a kiss-goodbye test of former resistance.

It's looks just as likely that the SPX will drop back to test support before the SPX would test resistance. As always I watch closes to see how prices are treating possible resistance or support at the 9-ema. Consistent daily closes above that turning-higher moving average means support has held and means that we need to be prepared for a possible bounce. Consistent daily closes beneath the 9-ema, the red moving average in the chart, and particularly below about 1379 would instead bring the SPX back into the congestion zone in which it had been trapped for several weeks.

That action would lower potential for the SPX to reach toward the upside target and would additionally question last week's breakout. While closing beneath 1379 would set up another potential downside target at the first red oval, it also brings the SPX back into that same chop zone in which movements above or below supposedly key levels weren't that predictive after all. I wouldn't be too quick to assign probabilities to a stronger downside move.

As frustrating as this process is, I began warning several weeks ago that the SPX could chop around for several weeks before we knew the ultimate outcome and next direction. The next direction might not be predictable, but the chop was exactly as predicted.

Any breakdown through last week's low that isn't quickly reversed sets up the potential for a decline to the first red oval. One of the lines comprising that potential support level is the 120-ema, if you need that information.

The Dow also took the "leap up" option last week. It set a potential upside target just above 13,350.

Annotated Daily Chart of the Dow:

Today's retreat did not change the chart characteristics or erase the potential upside target, but neither did it increase confidence in the Dow's ability to reach that upside target. I'm not seeing the Dow's sister index, the Dow transports ($DJT) confirm any strength in the Dow. As long as the transports don't confirm strength, I remain somewhat suspect of Dow gains. If the Dow does rise to test upper resistance, I would be watchful for the possibility that resistance could assert itself on daily closes from about 13275 to 13360.

A drop to test the 9-ema, the red moving average in the chart, seems as likely as a further jump to test that upside target. I would make sure I could defend my trades in either instance. Consistent daily closes above the 9-ema, if tested, warn us to prepare for another bounce possibility. Consistent daily closes beneath 13100 and particularly below about 12930 would again set a potential target at the first red oval.

The NDX's chart proves quite interesting if you like the nitty gritty of technical analysis. Friday's gap higher, the small-bodied candle produced on Friday, and today's gap lower produced a formation that was oh-so-close to the "Abandoned Baby" candlestick reversal formation. That formation is rare. According to one pattern dictionary, the formation requires that the shadows or candle wicks on Friday's candlestick be completely above the shadows or candle wicks of Thursday's and today's. That didn't quite happen since Friday's candle shadows dipped so low. Close, but no cigar. Still, could this be an evening star pattern? Is there a reversal in the making? Interesting, and it alerts us to be watchful, but it proves nothing.

Annotated Daily Chart of the NDX:

As we saw in the first two charts, no technical damage was done today. The chart does suggest a bit more strongly that the NDX could drop back to test the 9-ema. However, we know by now that such "suggestions" are untrustworthy when a major index can be dragged around by a single stock.

As long as the NDX maintains daily closes above its 9-ema, the red moving average, it maintains a potential upside target that would bring it up into a resistance zone that stretches from about 2760-2800. Consistent daily closes beneath the 9-ema would question that pattern. Consistent daily closes beneath the 45-ema, currently near 2675, would further weaken the prospect of a retest of the month-ago highs. As we witnessed last week, no outcome is a given, but that doesn't prove a failure of technical analysis. We should always think in if-then scenarios, and if a certain thing happens but then something unexpected follows, our first thesis was wrong.

Be able to defend your trade with trade-appropriate adjustments against a rise to retest the month-ago highs if the NDX maintains daily closes above the 9-ema. Consider switching to a stance that defends against a retest of last week's low if it drops below the 45-ema on consistent daily closes. If the NDX drops through last week's low, then prepare for the possibility that it could drop to the first red oval.

The RUT's chart proved interesting today, too. By mid-morning, the RUT had erased all of Friday's gains. It spent the rest of the day scrambling to get back above and then stay above last Thursday's close, but it couldn't end the day above Thursday's close.

Annotated Daily Chart of the RUT:

The candle produced today perhaps increased the chances that the RUT will be among the first of the indices to drop back to test its converging 9-ema and 45-ema's. That candle did not predict the outcome of such a support test if it occurs. Although the chart currently maintains the possibility that the RUT could bounce from any test of the 9-ema and charge up to retest of its former supporting trendline, now in the 847-850 zone, we have to be cognizant of possible strong resistance a bit closer. The RUT has not broken out above the 831-833 resistance zone that held in back in much of February and early March. The middle of March, the RUT zigged and zagged around about 831.50-832.00, so while it was printing higher numbers, it was still showing the importance of that level. I still consider 831-833 to be potentially important resistance to be cleared on consistent daily closes before we can consider that higher target in play.

Conversely, a drop below the 9-ema just puts the RUT back into another congestion zone from the two weeks leading into last week's post-FOMC/AAPL breakout. Consistent daily closes beneath about 794 are needed to set the next potential downside target at the lower red oval. Right now, it's just a choppy mess that unfortunately doesn't allow us to make many predictions.

I've been recommending for a few weeks that subscribers put the RLX, the S&P Retail Index, on their radar screens as one of the indicator indices they watch. I don't like to bet on the major indices turning lower if the financials, transports and the RLX are charging higher. The transports are no longer moving much at all. The components of the RLX have been on a momentum run, and they did it again last Friday.

Annotated Daily Chart of the RLX:

That was a textbook upside breakout, and the breakout did just what such a breakout is expected to do. Prices soared when released from all that pent-up pressure. When I saw what was happening with the RLX on Friday, I didn't hesitate to adjust my May RUT butterfly to accommodate the upside movement. It didn't matter what I believed "should" happen or "might" happen this week as we move into the "sell in May" period.

Today, the RLX paused, however, forming a small-bodied candle on its daily chart. Equity bulls don't want to see a strong reversal tomorrow as that will question the sustainability of the breakout. I remember reading long ago, in the early 2000's, a writer's caution that increased volatility immediately after an upside breakout was a bad thing, often a predictor that the breakout was a false one. It's still a good idea to keep this one on your radar screen.

Although there's not room to display all the charts I'd like to display, it should be noted that both the VIX and RVX rose today, as they should have done if the decline was trustworthy. However, each ended near potential resistance, so their next directions are no clearer than those of the SPX and RUT.

Tomorrow's Economic and Earnings Releases

Tomorrow, many European countries, including France, Germany and Italy have bank holidays, but that doesn't mean that we won't be reacting to news concerning those countries. Near the close today, I was hearing rumors that about a revision of Portugal's projected 2012 economic expectations and a further downgrade of Spain's credit. I wasn't able to confirm those rumors and so won't go into detail, but they illustrate how vulnerable we remain to news from Europe.

The U.K. releases its Manufacturing PMI at 4:30 am ET our time. Given that the U.K. met conditions for a technical recession last week, that report may prove important but likely not as market-moving as our own ISM Manufacturing PMI, due at 10:00 am ET. Experts predict a drop to 59.1 from the prior 61.0. Today's Chicago PMI did nothing to assuage that concern. In fact, last weekend, the prediction had been for a drop to 59.2, a prediction that was lowered today.

Total Vehicle Sales will be released all day. Sales are expected to number 14.5M, up slightly from the prior 14.4M.

Two weekly numbers related to retail sales will also be reported before the open, one the ICSC-Goldman Store Sales. These are comparable store sales at major retail chains. The Redbook weekly sales at chain stores, discounters and department stores will be reported at 8:55 am ET, as is typical each week.

Companies reporting earnings tomorrow include AVP, BIIB (BMO), BRCM (AMC), CHK (AMC), LM (BMO), MMI (AMC), PFE, and VLO.

What about Tomorrow?

Many indices today flirted with ascending trendlines drawn off last Monday's lows, dropping toward them. I haven't drawn them on the charts below because they coincide with some of the Keltner support levels already shown on my charts, but you might want to draw them on your own charts.

Annotated 30-Minute Chart of the SPX:

As you can see, when the SPX was climbing late last week, it scaled the 9-ema, the red moving average in the chart. It may have pierced it during 30-minute periods but it formed most candle bodies at or above that moving average. We knew the trend had changed this morning when most 30-minute closes, until the last-minute pop at the end of the day, were below that moving average. Sometimes technical analysis can be as easy as that.

Was that last-minute pop meaningful? We'll know more about that tomorrow, but I try not to get too worked up either way over last-minute developments like that, particularly during earnings season when an important component might be reporting. This last-minute bump higher seemed to have been repeated in financial-related indices, too, and not in many others.

As the SPX was situated at the end of the day, it seemed about as likely to run up to 1402 as it was to drop to 1390, although I would certainly consider today's low to be potential support. If the end-of-day pop was to be trusted, the higher run-up seemed most likely. Support and resistance on 30-minute closes might be found at those targets. Next potential targets are also marked if the SPX breaks through those targets on consistent 30-minute closes. Remember that these channels are dynamic and will have moved in the direction of the price movement before the outlying ones could be tested.

If the SPX is bounced back from a resistance or support test and can't break through, it might drop to test next support (if resistance holds) or rise to test next resistance (if support holds).

Annotated 30-Minute Chart of the Dow:

The Dow's setup is similar, although the more easily manipulated Dow showed an even stronger pop toward the next potential target and resistance on 30-minute closes. Next potential targets are now at the first green oval on the upside, but possibly at today's low on the downside. A break through today's low or the first green oval on consistent 30-minute closes targets the next ovals. Bounces back from resistance or support might find next resistance or support at previously tested levels.

Annotated 30-Minute Chart of the NDX:

The NDX did not see the same last-minute pop in prices. At the end of the day, it was being squeezed between converging support and resistance. No clear breakout had occurred. Nearest support and resistance on 30-minute closes lay at about 2720 on the downside and the 9-ema on the upside, although I would extend short-term upside resistance up to about 2730. If 2720 and 2730 are broken on consistent 30-minute closes, look to the next marked levels as potential targets and also as potential support and/or resistance levels. As with the other indices, if support or resistance holds, look to the opposite next marked level for a next potential target. In other words, if the NDX drops quickly to 2708 tomorrow morning, but closes the first few 30-minute periods above that level and starts bouncing, look to the 2720 level or wherever the 9-ema might then be as a possible next target and next resistance.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's setup looks much like the NDX's. An attempted last-minute pop was quickly reversed in the RUT. A pop up to about 819.30 or perhaps even 821.40 looks about as likely as a drop to 812.60.

What's my take? The indices have been chopping out a possible bearish formations. Last week's post FOMC reaction didn't surprise me, particularly when so much of our indices' performances are based on the performance of one stock, AAPL. However, if that bearish interpretation is the true one, it's about time for something bearish to happen, or the bearishness will have been worked off by this sideways choppy mess instead. I don't know whether that "something bearish" will or will not appear. They looked more likely last week, of course, than this one.

Each day, I evaluate the next potential targets, both upside and downside, and evaluate how my trades will function if they're hit. I take appropriate action. In this environment, in fact, I've been hedging a bit too much, willing to give up some of my potential profit for sound sleep at night, but that's me and that's my trade. You decide what's right for you after you've studied the possibilities.