Market Internals

Introduction

This morning, heightened concern from the eurozone spread fears among global bourses already infected by China's overnight data. This morning's disappointing earnings results from McDonald's failed to cool the concerns.

U.S. traders woke to declining U.S. futures and a soaring yield on Spanish Government Generic 10-year bonds. Asian bourses had turned sharply lower in overnight trading, with the Nikkei 225 losing 1.86 percent; the Hang Seng, 2.99 percent, and the Straits Times 1.10 percent. China's Shanghai Composite dropped 1.26 percent. The air reeked of a malaise that appeared to be spreading.

Monday's Developments

At the time many East Coasters were turning on their computers, many European bourses displayed losses of over 1.70 percent. The yield on Spain's 10-year bonds had leaped into the stratosphere, reaching new record highs. Those yields were to close at a record closing high of 7.498 percent.

Italy's bond yields also jumped. Spain and Italy both banned short-selling of stocks. Spain's ban reportedly included derivatives. Here in the U.S., we know how such bans often work: an initial bounce in stocks included in the ban is often reversed. The downtrend the ban is meant to stop often resumes.

The FTSE 100 closed lower by 2.09 percent; the DAX, 3.18 percent; and the CAC 40, 2.89 percent. Spain's IBEX closed down 1.10 percent. Apparently, market participants continued to succumb to the malaise.

As Jim had noted this weekend, fear rose that other Spanish regions would join Valencia in asking for help. Catalonia admitted yesterday that it was considering asking for help, and a third region was rumored to be considering the move, too. By today's close, that third region, Murcia, had announced that it would apply for bailout funds in September.

Last week, Spain set up an 18-billion euro facility meant to help its regions. Today, plans were reportedly cobbled together for Germany's finance minister to meet with Spain's on Tuesday. Spain will reportedly ask for 300B euro bailout. Some experts say the situation has moved from a bailout of Spain's banks to a bailout of the country.

Finance ministers and troika members were going to be spread rather thin, it appeared. Fear also rose that Greece would not be able or would be unwilling to meet its commitments, cutting off aid. This weekend, Syriza leader Alex Tsipras, who has not stopped making headlines since he and his party failed to capture a majority, made headlines again. He predicted Greece would default, return to the drachma and supposedly live happily ever after. At the same time, Prime Minister Antonis Samaras was preparing to deal with international lenders later in the week. He claims Greece is in a Great Depression like the U.S.'s Great Depression. He wants to renegotiate the terms of the agreement forged with the troika.

So far, the troika members are having none of that. Der Spiegel, a German newspaper, reported that the IMF has told the EU that it will not be providing any additional funds for Greece. Those already speculating about a default in Greece stepped up the time frame for that to occur.

After hours, Moody's changed Germany's outlook to negative. It also lowered the outlook on the Netherlands and Luxemburg, while affirming Finland's triple-A rating.

How much of these news bites are just that, news bites and posturing before the meeting in Athens later in the week, proves impossible to ascertain. Meanwhile, rumors about Italy and, specifically, Sicily continued to circulate. News articles mentioned fears that Sicilian schools would not open after the summer vacation.

Writers for Reuters speculated that individual traders in Europe and the U.S. would soon be arrested and charged in the Libor-fixing scandal ("Exclusive: Prosecutors, regulators close to making Libor arrests." Matthew Goldstein, Jennifer Ablan and Philipp Halstrick). Banks facing regulatory action reportedly view the impending arrests as a vindication of their claim that the misbehavior was isolated and due to rogue behavior among a few traders. In earlier reports, Reuters had reported that current and former employees at Citigroup, Barclays Plc and UBS were among those being investigated, and the current article claimed that HSBC, Deutsche Bank, and Credit Agricole employees were also being investigated.

As if these upheavals weren't enough, Syria announced today that it holds both biological and chemical weapons and is willing to use them if threatened with foreign intervention.

The news wasn't all about Europe, however. China's machinery industry expanded 9 percent in the first half of 2012, well down from the year-ago growth of 16.2 percent. Moreover, the vice president of the Machinery Industry Federation said that the industry was dealing with "the most severe situation this year following the global financial crisis in 2008" ("China machinery industry growth slows sharply in H1," Reuters). Orders dropped 0.95 percent as opposed to the recent years' pattern of climbing more than 20 percent. Economic growth slowed to 7.6 percent in the quarter ending in June.

In the U.S., McDonald's (MCD, 88.94, down 2.64 or 2.88 percent) earnings failed to heal the hopes of U.S. investors. Succumbing to the malaise infecting the rest of the globe, many U.S. equity indices gapped lower as cash markets opened. The dollar gapped higher, and dollar-denominated crude and gold turned lower, too. U.S. ten-year yields dropped to new lows. Then began the laborious reversals or, in some cases, reversal attempts. Several equity indices bounced from key support levels that really do need to hold to avoid even deeper declines. We'll study charts later. Unfortunately, the bounce attempts so far appear laborious.

Story stocks included China's state-controlled CNOOC (193.96, down 8.79 or 4.34 percent. The company announced that it wanted buy Canada's Nexen Inc. (NXY, 25.90, up 8.84 or 51.82 percent) for $15.1 billion. That price amounts to a 61-percent premium to Friday's closing price, a Reuters article noted, offering a quandary to Canada's government. CNOOC promised that it would make Canada its home base for its operations in the Western Hemisphere as part of the deal. Buying Nexen would make the Chinese company the operator of the largest oil field in the U.K., too.

The last time CNOOC attempted a North American move of this nature was when it tried to buy Unocal in 2005. That attempt wasn't well received. Canada's government has the right to block foreign investments more than C$330 million, and the industry minister has already confirmed that a review of the deal will be conducted. China's Sinopec also made news, saying it would buy 49 percent of Talisman Energy's British unit.

Also among the story stocks, GNC Holdings (GNC, 37.40, down 0.25 or 0.66 percent) announced a new lineup on the board. Norman Axelrod will be replaced by Chief Executive Officer Joseph Fortunato as chairman.

Also stepping up as a story stock, Cisco (CSCO, 16.07, down 0.29 or 1.77 percent) announced that it was laying off about 1,300 employees, about 2 percent of its workforce. After the close, the stock dropped another $0.25 to $15.82.

VMware (VMW, 89.23, down 0.57 or 0.63 percent) also figured in the news, for its earnings report and its acquisition of privately owned Nicira for $1 billion. Earnings reports do not appear to be comparing apples to apples, with headlines declaring a "narrow beat" but with that beat a non-GAAP $0.68 a share compared to expectations of $0.66 on an adjusted basis. Another article pegged its adjusted earnings as $0.62 against expectations of $0.60. After hours, VMX dropped another $0.63, to $88.60 as this report was prepared.

Important companies reporting earnings included Halliburton (HAL, 31.51, up 0.74 or 2.40 percent). HAL reported adjusted Q2 profit of $0.80 a share on revenue of $7.23 billion. Analysts forecast $0.75 a share on revenue of $6.93 million. Those adjustments included $0.20 a share set aside for loss contingencies related to the Macondo well explosion and Gulf of Mexico leak. HAL's earnings report had been heralded as a bright spot in the morning, but after the bell, HAL dropped $1.06 to $30.45 as this report was prepared. I wasn't able to determine the reason for the after-the-bell decline, but one article pointed out that its margins had fallen and questioned global growth.

As noted at the beginning of the article, McDonald's (MCD, 88.94 down 2.64 or 2.88 percent) reported before the open, as did HAL, but its report had never been deemed a bright spot. Earnings were $1.32 a share on revenue of $6.92 billion, disappointing numbers to many market watchers and investors. Analysts had predicted $1.38 a share on $6.94 billion in earnings. Chief Executive Don Thompson blamed a slowdown in the global economy and "persistent economic headwinds," according to a Marketwatch article. Per share earnings were lower than the year-ago level, but the company noted that global comparable-store sales rose in each geographic region and were 3.7-percent higher globally. After the close, the stock price inched up a couple of pennies.

After the close, Texas Instruments (TXN, 26.82, down 0.43 or 1.58 percent) reported earnings of $0.38 a share on revenue of $3.34 billion after charges. Analysts predicted earnings of $0.34 a share on $3.35 billion. Headlines exclaimed that those earnings were almost 34 percent below the year-ago level, but market participants appeared to be concentrating on other factors. The stock had risen $0.16 to $26.98 as this report was prepared.

Baidu (BIDU, 107.10, down 3.13 or 2.84 percent) also reported after the close. Q2 earnings were $1.26 a share on revenue of $858.8 million. The company had been expected to report $1.12 on $850.8 million. Analysts had recently lowered their estimates for the next quarter out, and this report must have caught some shorts flat-footed. BIDU was exploding higher in after-hours trading, up $7.57 or 7.06 percent to $114.66 as this report was typed. If the stock could maintain that after-hours level, that would be the first move above a short-term swing high since early June, but that's always a big "if" when a stock makes an after-hours jump due to short-covering on an earnings beat. Let it settle into trading tomorrow before you draw too many conclusions about this early reaction.

As part of its earnings report, CTS Corporation (CTS, 8.86, down 0.46 or 4.94 percent) announced that its Thailand facility is now fully operational. The stock was up $0.07 to $8.93 in after-hours trading after reporting net earnings of $0.10 per diluted share, compared to $0.12 per diluted share in the year-ago period. Steel Dynamics (STLD, 12.22, down 0.20 or 1.65 percent) was down during the market day and dropped another $0.14 after it released earnings after hours. Crane Co. (CR, 37.36, down 0.51 or 1.35 percent) also reported in the after-hours period. The company declared a 8 percent dividend increase. The company said that 2012 earnings would range from $3.75 to $3.95 a share, with 2011 earnings at $3.43 a share. The company reported a loss for this quarter that was pegged on asbestos- and environmental-related provisions.

Charts

I set up nested Keltner channels. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but usually not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction, however.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read a too-length Wrap.

Annotated Daily Chart of the SPX:

Next potential support on daily closes extends from about 1336-1347 in a wide support band, including the support of the channel in which the SPX has been trading higher. Next potential resistance is at the red 9-ema, wherever it might be located tomorrow, and then again at the midline of the channel.

The SPX's configuration looks much as it did when it last tested the bottom of this channel on 7/12. A bounce up through the channel again can't be ruled out. However, successive rises through the channel have stopped further and further short of the top of the channel, hinting that upward momentum may be waning. Breaking the channel's support could send the SPX down hard and fast. I could point out various potential historical support levels, but a decline of that type stops when it stops. If that channel support breaks on consistent daily closes, I would consider the SPX vulnerable to that next Keltner target while remaining cognizant of possible interim historical support.

A bounce occurred just where it needed to occur. Be wary if it doesn't last.

Annotated Daily Chart of the Dow:

While the SPX could not rise all the way to the top of its rising channel on the last two tests, the Dow barely managed to hit the midline of its analogous channel. Today, the Dow barely avoided breaking through its rising channel, finding tentative and perhaps temporary support at a Keltner channel boundary marked with the lower orange oval. The Dow is weaker than the SPX by these measures. Yes, the Dow bounced well off its intraday low. Yes, it managed a close above the converging support lines. However, it barely managed a close inside that channel. The Dow's sister index, the transports ($DJT on many charting programs) looks even weaker.

A fall outside the channel sets a potential target at the first red oval below the current position. On a channel breakdown, the Dow could find support at an interim level of potential historical support but it could barrel lower, too, as disappointed market participants abandon their longs. If the Dow should sustain closes below that marked Keltner support near 12575, confirming its breakdown out of the channel, be prepared to defend trades down to the nearest red oval.

If the Dow should rise, strong resistance on daily closes might be found at the red 9-ema, or at the midline of the rising channel. The 9-ema is currently at 12,789, but will move as prices move, of course.

Annotated Daily Chart of the NDX:

The NDX pierced channel support, found a safety net at the Keltner support marked near 2545, and bounced above its opening level, one of the few pictured indices tonight to accomplish that feat. If the NDX continues its bounce, the red 9-ema, wherever it is at the time it's tested, might provide significant-enough resistance on daily closes to turn the NDX lower again, but it's close enough now that the NDX could just gap above it. For now, however, it serves as resistance. It's at 2605 as I type, but will change as prices change. Next potential resistance is at the midline of the rising channel.

If the price channel's support is lost and confirmed by the loss of the Keltner support at the lower orange oval, a new target is set at the nearest red oval. Round-number support and historical swing lows as well as a gap are there to provide potential interim support. However, if prices start barreling lower, don't count on them holding. Prepare to defend your trade down to that next red oval. The NDX is one of the few indices in which up looks about equally likely to down, but resistance at the 9-ema did hold.

Annotated Daily Chart of the RUT:

If the NDX looked better than some other indices by the measures shown on these charts, the RUT looked worse.

The RUT often plays a leading role, and today it led the way in a direction many wish it hadn't gone. It broke through the support of its rising price channel. Now all that former support from the price channel as well as Keltner lines extending up to the red 9-ema all stand guard as new potential resistance against bounce attempts. The RUT would have to maintain daily closes above that 9-ema before it sets the next upside target. That would be at the midline of its rising price channel.

Instead, the chart suggests that resistance is stronger than support and that down is easier than up, other than a bounce attempt that looks likely to fail at next resistance. Something needs to be done to change that setup soon, if it's going to change. Prices holding above the 9-ema would change the setup.

For now, however, a downside target at the nearest red oval remains a possibility. As with the other indices, interim swing highs and lows might now provide support, but if prices barrel lower, as they can with the RUT, no swing highs or lows are going to stop the cascade. Be prepared to defend your trade to a drop to that first target, or, if the RUT can leap up above the 9-ema on daily closes, up to the midline of the rising price channel.

I mentioned recently that it would be a good idea to keep the RLX (retailers) and BIX (financials) on your radar screens. The RLX was trading in a triangle narrowing toward its apex, and the BIX was testing the support of its rising price channel similar to the channels seen on other charts. The RLX broke to the upside out of its triangle shape, suggesting more upside, but then immediately fell back to test support. That test isn't yet decided, but so far the news is more good than bad. Like the RUT, the BIX has fallen out of its rising price channel, and the news is more bad than good. Mixed picture here.

Annotated Daily Chart of the BIX:

Tomorrow's Economic and Earnings Releases

Tomorrow's Scheduled Economic Releases:

FOMC Chairman Ben Bernanke's talk concerns early childhood education, and he will speaking via satellite to the Children's Defense Fund National Conference in Cincinnati. One calendar source marked this as a potentially high-impact event. However, that may not be true unless there's a question-and-answer session that deals with economic issues, he uses this occasion to announce some easing or other program the FOMC contemplates, or some global situation has turned so serious that he cannot appear. The first two seem unlikely, and let's hope the third doesn't occur.

Important earnings for tomorrow are headlined by AAPL, of course. No official time has been supplied for earnings, but one source believes they will be after the market close. Jim Brown covered earnings expectations in this weekend's newsletter. Other important reporting companies include BIIB (BMO), BRCM (AMC), EMC (7:00 AM), JNPR (AMC), LXK (BMO), MO (BMO), NFLX (AMC), T (BMO), TRIP (AMC), UPS (BMO), and WHR (BMO).

What about Tomorrow?

The large moves over the last few trading periods scrambled the shorter-interval intraday charts. I've dialed up all the way to the two-hour charts to find reliable potential support and resistance levels.

Annotated 120-Minute Chart of the SPX:

While this Keltner setup is not perfect--no chart setup is--it does do a good job of showing how Keltner channels function to contain prices at potential support and resistance at swing highs and lows. Potential support and resistance levels are marked, but the primary attention must focus on what happens if the support at that highest red oval is lost. I would certainly be prepared to defend a trade down to the next lower Keltner target if that should happen. At the same time, I would remain aware of potential interim support, such as that offered at the marked prior swing low at 1309.27. Potential resistance on two-hour closes over the next couple of days is also marked, with the red 9-ema probably the strongest level of resistance.

So far, the climb looks a bit more labored than bullish traders would prefer, complete with candles with upward spikes. That doesn't preclude further more bounce, but it does question the sustainability of the bounce.

Annotated 120-Minute Chart of the Dow:

The Dow's setup is similar although the spike off the first two-hour low is more dramatic. Most prices tend to move within those boundaries marked by the purple Keltner channel, with the Dow again testing the lower support of that channel today. It rose up to test resistance but didn't push past it.

If the Dow rolls down again and that Keltner channel and trendline support fail on two-hour closes, prepare for the possibility that the lowest Keltner target on that chart will be approached. Guard bearish profits at the swing low marked on the chart at 12450.40.

Today, the Dow demonstrated the potentially strong resistance posed by the configuration at the orange oval. Next highest potentially strong resistance, and the next target is at the red 9-ema, closely approached on the last two-hour candle before prices fell back. The Dow needs to climb above and sustain values above that 9-ema. This chart setup suggests that the Dow could spend a few two-hour periods either side of the 9-ema before final direction is determined, so be leery of drawing too-quick conclusions.

Annotated 120-Minute Chart of the NDX:

Although the NDX's candle looks far stronger on the daily chart, this two-hour setup looks remarkably similar to other charts on other indices. The NDX bounced from the support it needed to bounce from, but it stalled at the next potential resistance it faced after first piercing it. Nothing on this chart precludes some time spent testing the 9-ema, now just above 2601, and I wouldn't even be surprised to see prices zigzag above and below that moving average for a number of two-hour units before settling on a direction.

A failure to maintain Keltner support on 30-minute closes at the Keltner channel, confirmed by a break below the trendline, sets up a potential Keltner target at the lower red oval. Potential interim support exists at the marked 2510.37 swing low, but the NDX can barrel lower quickly when other indices are doing so. Be aware of the importance of AAPL's upcoming earnings report tomorrow.

Of course, if AAPL can be important to the downside, it can be to the upside, too.

Annotated 120-Minute Chart of the Russell 2000:

This is not a happy chart.

The RUT's chart is a study of "what could happen" events. Note what happened to the left side of the chart when the RUT broke through that upper purple Keltner channel and barreled up toward the next target. That can happen to the downside, too, and just as fast. The RUT was weaker today when measured by its reaction to potential Keltner support and also with reaction to the rising trendline shown on all these charts. It set a potential downside target at the lower red oval. If the RUT does barrel lower, traders should protect bearish profits as the marked swing low of 758.10 is approached.

The RUT has some work to do, and some fast work, too, to erase that downside target. In order to lessen the possibility that the RUT will barrel lower, it needs consistent two-hour closes above that lower purple channel boundary. If it climbs back into the channel, it will soon face trendline and 9-ema resistance, however, and I would watch for rollover potential from that level. Be willing to take profits quickly when they're offered. This is not a time to be greedy. Assess your trades before the close each day and determine if you need to close or hedge that trade, particularly if you're a weekly trader. Weekly trades just don't have time to recover from a move like this morning's if you hadn't already hedged for it before Friday's close. If entering new trades, decide that now is not a time to size up, particularly if you're a relatively new trader.

Here's the story those two-hour charts are telling me. Dip-buyers stepped in just where they would have been expected to step in, but they don't look fully committed yet. They look to be hesitating until we get past AAPL's earnings or important news from Europe on Wednesday. If we get that important news ahead of time, prices may not wait on AAPL. We're at a make-it-or-break-it level again, as breakdowns out of those rising price channels convert them into nothing but bear flags. Prices need to hold that support. I'm not so sure they will.