Market Internals

Introduction

European elections this weekend shook up already fragile understandings hammered out among the EU countries. In doing so, they also shook up investors and market participants across the globe, at least for a few hours. The Nikkei dropped 2.78 percent; the Hang Seng, 2.61 percent; and the Straits Times, 2.19 percent. Sunday evening, U.S. futures had dropped heavily, too.

By the time most U.S. investors were setting up their trading screens this morning, our futures had moved well off their lows as had the DAX and CAC 40 in Europe. The FTSE 100 wasn't trading due to a bank holiday. Although the Eurozone's Sentix Investor Confidence disappointed, Germany's factory orders came in well above expectations. If this weekend's elections suggest that austerity measures already in place are going to be thrown up and come down again in disarray, growth will be doubly important. By the European close, the DAX had scrambled into positive territory, up 0.12 percent, and the CAC 40 had gained an impressive 1.65 percent.

We sometimes see a sell-the-rumor, buy-the-fact effect whenever the market is presented with an unsettling possibility. It may be possible to attribute some of the recovery off the overnight lows in Europe and the U.S. futures to that effect, but the ultimate outcome of the elections has yet to be determined.

The kindly uncle demeanor of Warren Buffett perhaps refocused attention in the U.S., too, so perhaps he deserves some credit for calming fears this morning. Buffett was being interviewed in print and on television this morning in conjunction with the heavily attended Berkshire Hathaway three-day annual meeting in Omaha. Buffett's pronouncement on Europe? He reminded listeners that European countries don't have access to a printing press and that lack limits choices in resolving their problems. He thinks Europe has more pain ahead but that solutions will "likely" be found.

Whatever the reasons, those tuning into market-related newscasts last night saw far tamer markets today that the futures predicted. By the close, most indices weren't too far off the unchanged mark, being either a little above or a little below that mark. Crude continued its losses, with reasons behind those losses being detailed by Jim Brown this weekend. Changes in margin requirements are contributing to those losses, Jim warned.

Monday's Developments

Today's U.S. economic release schedule proved light, with only the Consumer Credit Report at 3:00 pm ET. Analysts expected consumer credit to rise to $9.6B from the prior $8.7B. Instead, the prior number was revised higher, to $9.3B, and the current reported number soared to $21.4B. This gain was the biggest leap since November, 2001. Credit card debt rose by $5.1 billion, but the biggest increase came from auto loans, student loans and personal loans.

The biggest economic news in the U.S. might not have occurred here in the U.S. at all but in those European elections. As Jim Brown detailed in a special release last night, Greek voters ousted the people who had hammered out the country's bailout conditions. Jim Brown's newsletter detailed the various parties involved and the results. I saw a lot of articles about Greece including the term "Eurozone exit" in the title.

Another European election threw even more uncertainty into the mix. Francois Hollande was elected France's first Socialist president since Francois Mitterande.

Before the election, Hollande had gone out of his way to assure the world that he was "not dangerous," although his "austerity shouldn't be inevitable" statement after the election must have heightened Germany's concerns. However, a Reuters-carried blog by Peter Gumbel labeled him "more Glass-Steagall than Lenin" ("What happens if Hollande wins?). While I'm certainly not going to take a stance on France's politics or the pros and cons of one political belief system over another, what matters to Europe and also to us is that this election brings more uncertainty to the European situation.

Some market watchers are reassured by Hollande's focus on debt reduction and consider it credible, while others discuss the plans with a metaphorical raised eyebrow. Those questions won't be resolved by this article or by developments this week. The problems he will face may stymie his efforts, whether they would normally have been successful or not. Market watchers will be closely watching his choice of people to fill top posts in his government as a clue to the direction he'll take.

By this morning, we were also seeing the expected protests by Germany's government. Germany's government firmly rejected the idea of any possible reworking of the European Union's fiscal pact. Germany's spokesperson Steffen Seibert said, "It is not possible to renegotiate the fiscal pact" (CNN). That pact imposing austerity measures had been hammered out earlier this year in difficult meetings and had since been signed by 25 of the 27 Eurozone member states. I had also mentioned last week that Hollande wanted to expand the ECB's mandate, among other changes that Germany also rejects.

Just to throw another little dollop of doubt into the mix, Spain's prime minister announced that the country would likely announce bank clean-up measures this week. The measures are meant to ease doubts about the solvency of the banks. The announcement itself might not have eased doubts.

Some of you may remember that Moody's Investor Service had been expected to begin releasing a review of more than 100 European banks the week of April 16. Instead, the company postponed that release until last week. It said at that time that it might cut the credit ratings of 114 European financial institutions and 17 global ones. UBS, Credit Suisse and Morgan Stanley might see its ratings cut by at least 3 notches, one article said. Barclays, BNP Paribas, Credit Agricole, Deutsche Bank, HSBC Holdings and Goldman Sachs might be cut by two notches, and Bank of America and Nomura by one.

. The earnings season is winding down, with reports now less likely to move the markets. Companies reporting earnings today included DISH and TSN. DISH (30.93, -0.38 or 1.21 percent) reported a profit of $360.3 million or $0.80 a share. This result was well below the year-ago quarter's results, but that year-ago quarter had included a gain from litigation with TiVo. Revenue was $3.58 billion. Analysts had forecast revenue of $3.62 billion and earnings of $0.70. DISH has been taking steps to increase interest among customers who will spend more on videos, hence benefiting from its acquisition of Blockbuster and launching of a streaming service in October. Immediately after the close, DISH was still dropping, down to $30.71 as this report was edited.

TSN (18.63, + 0.59 or 3.27 percent) reported Q2 profits of $166 million or $0.44 a share. Revenue was $8.27 billion. Expectations were earnings of $0.39 a share on revenue of $8.47. The company guided expectations of full-year earnings to $2.00, with the consensus having been $2.01 a share. The company said chicken and pork sales increased while beef sales saw "extremely difficult market conditions" and broke even. Immediately after the close, TSN was still dropping and was at $18.46 as this report was edited.

Adding some upbeat focus today, Facebook's pre-IPO road show began with a presentation in NYC for Facebook's $10.6 billion offering. The ultimate valuation constitutes the primary concern. Facebook estimates the company's value more conservatively than some, at $96B, while other analysts value it up to $160B.

Story stocks included AIG (31.84, -0.99 or 3.02 percent). The Treasury plans to offer about 163.9 million shares of its common stock at $30.50 per share, the company announced. AIG said it will purchase 65,573,770 shares of that common stock in the offering and will pay the public offering price. The Treasury will also allow the underwriters to purchase up to an additional 24,590,163 shares, AIG announced, to cover any over-allotments that might occur. Immediately after the close, AIG had climbed three cents off the close and was at $31.87 as this report was edited.

Electronic Arts (EA, 15.13, +0.01 or 0.07 percent) investors dropped the stock in after-hours trading, possibly due to a drop in active subscribers for its "Star Wars" multigame player and due to what was termed a weak forecast for Q1. Adjusted earnings were termed in line with expectations. As this report was prepared the stock was down $1.34 from the closing price, to $13.75 in after-hours trading.

Let's look at charts.

Charts

Last Monday, I closed the Wrap with the notation that if the bearish formations were to fulfill their bearish potential, prices needed to begin breaking to the downside soon. Otherwise, the bearish potential would have been fulfilled by the prolonged sideways chop. The formations would have been rendered useless as a predictive tool.

Before prices broke lower late last week, market participants lived through a wild Tuesday last week, with prices geysering higher at the open only to be at least partially reversed in many cases by the day's close. The rest of the week proved weak. Indices of course broke lower, but not quite low enough to confirm bearish formations or set new downside targets in many cases. Sunday night, futures action hinted of further breakdowns that just didn't occur in cash trading.

By soon after the open today, many indices were finding toeholds at short-term ascending trendlines off the 4/10 and 4/23 lows. The SPX had managed to find a toehold slightly above its trendline off those lows. In fact, I did not mark that trendline on the SPX's chart since it wasn't tested.

Annotated Daily Chart of the SPX:

The SPX did drop down last week to test its 9-ema, as it had looked ready to do last Monday, but it certainly took a circuitous route! A wild but soundly reversed rally last Tuesday reached toward the next upside target before falling back. The SPX has been falling ever since, making last Tuesday's test look like a kiss-goodbye retest of the channel from which it had broken lower. The SPX paused for a couple of days at or above the rolling-over 9-ema and then finally lost that support on a daily close on Friday.

The SPX has traded back and forth across the 9- and 45-ema's (or 10- and 50-sma's, if you prefer) so often that they're rendered less valuable in predicting strength or weakness than is typical. However, on any bounce, I would watch for potential resistance on daily closes to be found at the convergence of the 9- and 45-ema's. If the SPX can maintain daily closes above those converging ema's, it sets up a potential retest of the 1405 level.

However, it's the other possibility that might concern traders. If the SPX should drop through the 4/10 low at 1357.38 and not bounce back within a half day or so, then the Keltner channel setup suggests a possible downside target at 1337-1340.

Before I check the Dow's chart, I always first check its sister index, the Dow Transports ($DJT), for guidance. That index continues to offer little guidance in the weird setups we've seen lately. Like other indices, it chops back and forth across its converging 9- and 45-ema's.

The Dow's swings proved a bit wilder and wider.

Annotated Daily Chart of the Dow:

The Dow spent the first hours of today clinging to a rising trendline off the 4/10 and 4/23 lows before scaling higher and then dropping back slightly into the close. That trendline also now coincides with psychologically important round-number support near 13000. A deep plunge through that rising trendline or a close beneath it that persists more than a day or so sets up a potential target near 12661-12710. That Keltner-suggested range coincides with the 4/10 swing bottom's potential support, too.

I would expect that support to be defended if it is tested. Conditions for U.S. equities turn rougher if that level is not successfully defended.

If the Dow should rally, I would watch for potential resistance on daily closes at the 9-ema, although that average is not as reliable a barometer of strength versus weakness as it sometimes is. If the Dow can maintain daily closes above that moving average or even breach it for more than a few hours, then a retest of 13278 is suggested. A possible upside target near 13400 would be next, depending on the result of any test of 13275.

The NDX is often a renegade index that pays little heed to such mundane chart scribbles such as moving-average support and resistance. Yet it has shown surprising coherence with respect to its 9-ema on the daily chart. Closes above that moving average or below it have been meaningful. Right now, the NDX is below that moving average. Last week's not-quite-perfect "abandoned baby" formation proved predictive after all.

Annotated Daily Chart of the NDX:

The NDX has set a potential downside target near 2560-2575. The setting of that target doesn't preclude the possibility of a run up first to test potential resistance gathering near the converging 9- and 45-ema's. These moving averages currently converge near the site of an important gap in the NDX, produced at the open on 4/25. If the NDX does bounce, watch for a potential rollover from that anywhere in that gap zone, especially in the level that marks the convergence of the 9- and 45-ema's. If the NDX should instead leap above the 2700 level and maintain closes above it, a potential test of 2740 is suggested.

If any test of the converging 9- and 45-ema's possible resistance produces a rollover, a decline to that next 2575-ish downside target still remains possible. Attempt to set up trades that can be managed if either 2575 or 2690 is in the cards in the next week.

Although I didn't want to clutter the RUT's chart further by drawing in the short-term rising trendline, the RUT also spent the part of the day clinging to the rising trendline off the 4/10 and 4/23 lows before mounting an intraday rally and pulling back into the close.

Annotated Daily Chart of the RUT:

Consistent closes below about 791 set up a potential downside target of 772-773, where bullish market participants hope with all their hearts that support will hold, if tested. Even today's pullback from its high, leaving that small upper candle shadow or wick at the level that bounced the RUT on a pullback day on 4/13, looks a bit worrisome.

If the RUT should continue rising instead of rolling over, watch for potential resistance on daily closes anywhere in the 805-810 zone. Sustained closes above that zone set up a potential retest of 821-823 and then last Monday's high after that. The next target if levels above those are sustained on daily closes is marked by the nearest green oval.

I've been suggesting that readers put the RLX, the S&P Retail Index, on their radar screens. It had been on a high-momentum run. Drawbacks in some other indices didn't seem to stick as long as the RLX was climbing. Its actions showed that the momentum traders were still willing to make bets on U.S. equities. AAPL's chart was showing the same thing. After the RLX's classic break up through the confirmation level of a bull-flag formation, it zoomed higher, just as it should if the momentum run remained in place. However, then the prices became more volatile, always a bit of a warning when such volatility occurs immediately after an upside breakout. Its end-of-week decline was steep, but the RLX still maintains values above its last breakout level.

Annotated Daily Chart of the RLX:

Equity bulls would like to see the RLX bounce from today's levels and scale above about 640 at least. The RLX looks, however, as if it could as easily drop all the way back to the top of that channel line marked on the chart, and the danger is that other indices will drop along with it. By all means, bullish investors want that former resistance to hold as support and to bounce the RLX if such a drop should occur.

Of course, other indices to keep on one's radar screens include the volatility indices, especially the VIX, RVX and VXN. They have run up to test resistance and are poised to either break through or drop down. Today they pulled back from that resistance test, but they are still within easy reach of testing or breaching it again this week. Sustained closes of the volatility indices above today's highs might look like a worrisome development to equity bulls. For newbie traders not accustomed to watching the volatility indices, they usually move in opposition to the equity indices. They are not a sound market-timing tool, however.

Tomorrow's Economic and Earnings Releases

Tomorrow morning, pre-market releases include the NFIB Small Business Optimism Index at 7:30 AM ET, weekly ICSC-Goldman Store Sales at 7:45 AM ET, and Redbook chain store sales at 8:55 AM ET. The only monthly economic release scheduled for tomorrow is the IBD/TIPP Economic Optimism, a diffusion index derived from a survey of consumers.

Richmond Federal Reserve President Jeffrey Lacker follows this evening's address on "Technology, Unemployment and Workface Development in a Rapidly Changing World" with a roundtable discussion with students in Greensboro, N.C. at 9:45 AM ET. Dallas Federal Reserve President Richard Fisher will address a business group at an event sponsored by the Dallas Regional Chamber and the Dallas Convention & Visitors Bureau.

Tomorrow's earnings include DIS (AMC) and OMX (BMO).

What about Tomorrow?

Although I don't like to clutter up charts too much, I'm including Fibonacci brackets on my 30-minute charts tonight. When the moves are as fast as they've been since last Tuesday's high, prices tend to slice through supposed support or resistance. The big moves scatter nested Keltner channels, moving averages or Bollinger Bands. Whether one believes that Fibonacci brackets have some relevance or are just silly, we know that they are often watched. They can at least pinpoint self-fulfilling levels of support or resistance, especially when they converge with other types of supposed support or resistance. The 38.2, 50 and 61.8 percent level can be prime levels to be watched for resistance after a strong decline. If indices can scale above a 61.8 percent retracement and maintain levels above it after a sharp decline, then the bearish case becomes less promising. A test of the 38.2 and 50 percent levels and rollovers from there warn that a rally off the lows may have been nothing more than a technical bounce.

Today, the SPX gathered its feet beneath it in early trading, ran up higher, and then pulled back to retest resistance it had broken through earlier in the afternoon. The test should show if that former resistance will now be support. That included the 30-minute 9-ema, and there was not a clear answer by the close.

Annotated 30-Minute Chart of the SPX:

If the SPX continues to hold onto the support of the 30-minute 9-ema on consistent 30-minute closes, a test of the 23.8 or even the 38.2 percent brackets appear next. By the time they could be tested, the Keltner channel lines may have continued their downward thrusting to converge with the Fib brackets. If the SPX can sustain levels above 1376-1378.50, watch for a potential test of 1383.40-1386.60, for example. If 1376-1378.50 proves to be strong resistance on 30-minute closes, watch for a drop back to test the 1368-1371 zone or possibly today's low, if that first zone fails to provide support on 30-minute closes. Each of these levels can help you stair-step your profit or stop loss plans in accordance to what's happening in the market.

If the SPX dives below today's low, watch for potential support at the 4/10 low of 1357.38. Then turn to the daily chart for next targets if that support is lost and the move isn't quickly reversed.

Annotated 30-Minute Chart of the Dow:

Most indices seemed to move in concert today, so their setups prove similar, so we see many similarities in the SPX's and Dow's 30-minute charts. If the Dow rises, watch for potentially strong resistance on 30-minute closes at the 13050-13056.25 zone, and look for a stair-step move up to converging next resistance from 13092-13110 if that first level of resistance is breached. And so it goes. If one of those proves to be resistance on 30-minute closes or if the Dow drops immediately upon the open, watch for potential support on 30-minute closes at the 9-ema, at 13000-13003, and then again at today's low. If today's low is breached and the move isn't quickly reversed, look to the daily chart for the next potential downside target.

Annotated 30-Minute Chart of the NDX:

If the NDX bounces tomorrow morning, watch for potentially strong resistance on 30-minute closes at converging resistance near 2651-2653. If that is breached on sustained 30-minute closes, look to 2665-2673 zone as next potential resistance, although that zone might have narrowed toward the top of the zone by the time it's tested. If that's breached, look to 2687.60-2688.75 as the next potential target and potential resistance on 30-minute closes. If instead the NDX drops, watch for support at the 9-ema, at 2635-2636, and at today's low. If today's low is breached on sustained 30-minute closes, look to the daily chart for the next downside target.

Annotated 30-Minute Chart of the Russell 2000:

If the RUT continues climbing tomorrow morning, be careful of potentially strong resistance on 30-minute closes at the convergence of several types of resistance near 796 and then again at 798.30-799.00. If those are breached, stair step possible targets and possibly strong resistance on 30-minute closes up to 804.40-806, where several types of potential resistance converge, and so it goes. If the RUT declines, watch for potential support on 30-minute closes at the 9-ema, or, if that is breached in the 791-792 zone and then again at today's low. If today's low is breached on sustained 30-minute closes, turn to the daily chart for the next potential downside target.

These intraday charts are all set up to show a potential test of the next higher short-term targets. They don't promise that will occur and they certainly don't give up a percentage guess as to how the individual indices will react to those tests. In fact, some of the indices, such as the SPX, Dow, and NDX, weakened a bit at the close, questioning the short-term bounce thesis. The daily charts still give pause, as this short-term bounce appears to be occurring against a backdrop of possible further weakness.

I've been counseling that you choose trades that can be defended against a strong move either direction, but that you be especially certain that you can defend a trade against a sharp drop or set appropriate stop losses. I mentioned the upcoming elections last weekend as a possible precipitating cause for a jarring of the markets out of their recent consolidation zones. I elected to close my May trade last Friday and lock in the profits rather than wait for hoped-for bigger profits but expose the trade to extra risk. Consider such steps. Trade small if you've never traded through a big downturn or a rabid relief rally.