After last week's equity party, it was time for a rest. Many markets across the globe did just that.
U.S. indices joined them. By the close, the SPX was down 0.31 percent; the Dow, 0.30 percent; and the Nasdaq, 0.27 percent. The NDX dropped only 0.05 percent; the RUT, 0.67 percent; and the SOX, 1.20 percent. Transports lost 1.45 percent.
The dollar steadied just above Friday's low. Gold mimicked equities, with gold futures pausing and producing a small-bodied candle near the top of their climb. Ten-year and thirty-year yields pulled back.
Crude futures did more than "pull back." They dropped much more heavily. Late in the day, experts were still looking for the reason behind a sharp three-minute, high-volume selloff. Traders were blaming high-frequency traders. CME said it was unaware of any technical issues on the exchange that might have contributed to the sell-off. IntercontinentalExchange Inc. had not made a comment at the time of this article.
Some, but not all, Asian markets had declined overnight, starting the process. Due to a bank holiday in Japan, the Nikkei 225 did not trade last night. The Hang Seng gained 0.14 percent and the Straits Times, 0.27 percent, but the Shanghai Composite slipped lower by 2.1 percent. Korea's Kospi inched lower by 0.3 percent.
The European markets we often watch opened in negative territory and closed there, too. The FTSE 100 dropped 0.37 percent; the DAX, 0.11 percent; the CAC 40, 0.78 percent; and Spain's IBEX 35, 0.08 percent. Something happened to trading in the IBEX at about 2:00 pm their time, with the IBEX climbing hard from the afternoon low reached about that time. While the index closed in negative territory, it closed just off its high of the day. I was not able to ascertain a reason behind the behavior, but it pays us to pay attention to what's going on in Spain, too. Yields on Italian and Spanish 10-year bonds rose. Spain's 10-year yield closed 5.974 percent, after having topped 6 percent again during intraday moves.
What happened today? Most of you probably agree with me that it was time for markets to take a breather and that's what they did, to put it in non-technical terms. They can't climb forever. Overbought conditions need to be worked off, either through a pullback or a few days of indecision.
Market developments delivered a reason to pause right on cue. It became apparent over the weekend that all the market uncertainties that seemingly been so handily settled over the last couple of weeks aren't quite so settled.
Over the weekend, European finance ministers met in Cyprus to begin hammering out plans for a banking union. Big decisions remain, with one of the biggest the date by which a single bank supervisor might be appointed and the ECB take over its new duties regulating banks.
Some finance ministers want the apparatus in place to oversee all European banks by the first of next year, as was originally planned. Not so fast, say Germany's finance minister, Wolfgang SchÃ¤uble, and others. They argue the impossibility of that Herculean task.
Germany's finance minister argued for gradual assumption of duties, beginning with the largest of the eurozone's banks. Some articles characterized him as arguing that only "systemically-relevant banks" be transferred from national oversight to ECB oversight.
After the meetings concluded, Germany's finance minister argued for stress tests. Some believe that he wants to exclude troubled banks from supervision by the ECB, limiting exposure to losses. Other finance ministers argue that the infrastructure must be put into place and to work by the first of the year. Those countries tend to want all banks included.
All 27 eurozone countries must agree on the new system, although non-euro countries will not have voting rights at the ECB. That little wrinkle adds another degree of uncertainty. Non-euro countries such as Britain, Sweden and eight others worry about the implications of accepting banking supervision by an entity in which they have no voting rights. Sweden's finance minister Anders Borg complained that "half of Europe doesn't have a voting right in" the ECB's oversight ("Europe at loggerheads over banking union," The Telegraph). "That's not acceptable," he continued. "It cannot stand. It will not be tolerated." Many ministers wanted national input into regulation in their nations' banks even after the new ECB plan goes into effect.
Also, just when we thought the German constitutional court had at least settled the constitutionality issue, a WSJ article on Sunday argued that the German Constitutional Court has not made its final ruling. That article characterized the German constitutional court as reserving judgment on the ECB's plan to buy unlimited amounts of government bonds. That article says that the court approval was limited to the establishment of the ESM.
We knew all this. It's not news that Britain and other countries were going to be concerned about ECB oversight of all banks. What changed was that with last week's developments behind us, we can and will focus on these issues. They're not minor, but they're not unanticipated, either.
Another answer in the "What happened?" question lies in the importance of China to the world's economy. Now that Europe and the U.S. have made their recent stimulus decisions, attention turns back to China. A spate of news clips and articles across the globe this weekend focused concerns on a country that some believe has been a economic engine for the entire globe the last several years. Several pessimistic articles draw from Societe Generale analyst Albert Edwards' recent report on China. He warned that China's deficit in the balance of payments in the second quarter marked a turning point for China's outlook.
Another turning point related to China was reached. Today, the U.S. announced plans to file a claim against China with the World Trade Organization in Geneva. The case will protest subsidies the U.S. claims China provided for exports of autos and auto parts into developing countries where U.S. companies might also export competing products. Some believe that stopping those subsidies could increase U.S. car sales and improve our employment situation. Some experts in the auto industry point out that such competition is not the sole reason for a decline in U.S. employment in the auto industry, however. They note that automation and a slower economy have also taken a toll.
With last week's developments behind us, forecasts of current quarter earnings here in the U.S. and news clips about the fiscal cliff will assume more importance. In addition, this morning ushered in stories about anti-Western protesters in Lebanon, Afghanistan, Pakistan and Indonesia, while the countries where the protests first broke out last week have seen several days of relative calm, according to an NBC article.
Today's U.S. economic calendar included only the Empire State Manufacturing Index, released at 8:30 am ET. That release was a disappointment to markets that were already weak in the pre-open session. Expectations were that the index would rise to -1.9 from the prior -5.9. Instead, it dropped deeper into negative territory, to -10.4. This is the lowest it's been since the aberration of November 15, 2010's one-month sharp drop.
The Federal Reserve's overview chart shows a recent pick-up in future general business conditions but a sharp decline in general business conditions, slipping below zero for the first time since October 2011. New orders and shipments fell, while prices received remained near zero and prices paid climbed. Although the chart demonstrated an upturn in future general business conditions, the Federal Reserve Bank of New York summarized those future conditions by saying they "were generally positive but lower than in July, indicating that respondents expected business conditions to improve little in the months ahead."
Several financials figured in the list of story stocks. Saturday, several newspapers reported that the Office of the Comptroller of the Currency was investigating JPMorgan Chase's (JPM, 41.19, down 0.38 or 0.91 percent) compliance with U.S. anti-money laundering laws. The New York Times may have originally broken the story, but the company itself said last month in its regular quarterly filing with the SEC that it anticipated increased scrutiny of its compliance measures. In the period after British banks HSBC Holdings and Standard Charters reached settlements or set aside funds for settlements to deal with charges that came about after heightened scrutiny of such practices, it was difficult this weekend to anticipate how investors would react to this news. Would they take it as a to-be-expected development or a where-there's-smoke-there's-fire kind of development? In addition to its losses during the trading day today, JPM dropped $0.14 more off the close in after-hours trading as this report was edited.
Apple (AAPL, 699.78, up 8.50 or 1.23 percent) can't be ignored when story stocks are discussed each Monday, especially when it reaches another new high as it did today. The company announced new record sales for a 24-hour period. Pre-orders for its new iPhone 5 over a 24-hour period doubled the previous record for a new phone release. They exceeded 2 million in that record 24-hour period.
Telecoms made it onto the list of story stocks, too, with AT&T's (T, 37.60, up 0.34 or 0.91 percent) gains resulting from those iPhone sales. SBA Communications (SBAC, 59.92, up 0.38 or 0.64 percent) and T-Mobile came to an agreement concerning an extension of T-Mobile's leases and the right to upgrade towers.
General Motors (GM, 23.80, down 0.34 or 1.41 percent) made the news. The company wants the Treasury Department to move a little faster divesting itself of GM shares. The Treasury Department didn't want to take up the company's offer to buy 40 percent of the government's holdings earlier in the year because the offer price would have represented a loss for the department.
Advanced Micro Devices (AMD, 4.01, up 0.11 or 2.82 percent) said this afternoon that its CFO, Thomas Seifert, resigned. The company hastened to assure investors that his departure was solely due to his desire "to pursue other opportunities," likely as CEO of another company. As this report was prepared, the company was last trading at 3.62, down $0.39 or 9.73 percent from the day's close.
Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. 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 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.
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 as happens when I list each potential support or resistance level individually.
Annotated Daily Chart of the SPX:
I always present both upside and downside potential targets in my Monday Wraps. Last week, the discussion on the upside target concluded by saying, "We have two types of channels visible here, Keltner and regression, so I want to be clear. As long as price breakouts above the purple channel's upper boundary are maintained on daily closes, a tentative target up toward 1480 is maintained. Today's close erased that breakout from Friday, but this is one day's action only, and we have to wait for confirmation." Several days later, the SPX again broke out above that purple channel and headed straight up toward that potential 1480 target, reaching an intraday high of 1474.51.
On all the indices' charts, we're going to see that prices broke through the interior Keltner channels in a similar manner. Many indices' prices headed straight for their upside targets on their outer boundaries, as did the SPX's. Some didn't get so far while others more closely approached those potential targets.
The SPX's pullback today came right on schedule. So, what do we make of it? Not much, so far. The three-candle formation from the last three trading days is not a pretty one, but today's pullback wasn't deep enough to transform it into a particularly bearish one, either.
From the perspective of the SPX's daily chart, this is a minor pause so far, occurring where it might be expected to occur. A renewed climb toward the SPX's new upper target, now at 1485-1490, is a possibility. So is a pullback all the way to 1440-1445, a support band that includes the rising 9-ema. In my opinion, it's time for a pullback to stronger support to regroup, but I thought that last week, too, and the pullback didn't occur then.
Our readers have to be prepared for either eventuality. If the SPX should tumble to that next support, bulls want to see that support hold on daily closes. Otherwise, the SPX risks a jolt lower to the 1420-1425 range. Lower potential targets are marked, if higher support levels don't trampoline the SPX higher again.
If the SPX should slice through several successive layers of potential support, consider scaling back on the buy-the-dip plans. Courtesy of all that choppy action we had over the summer, some of these layers of former chop zones are thick enough now that they should hold as support. If they don't, something's up, and you don't want to try to catch that knife that's doing the slicing.
Annotated Daily Chart of the Dow:
The Dow has consistently looked weaker than the SPX by several of the typical measures I use. It did not come close to approaching its new potential upside target, at about 13867 when it was first set and above 13900 now. It did set a potential upside target, however, so we must consider the potential for more upside as long as the Dow maintains consistent daily closes above 13490 or maybe at least above 13390. However, whether the Dow rises first or drops back to test at least the highest of those two support levels can't be predicted.
In normal market conditions, it would be time for Dow to either drop back or trend sideways long enough for the (red) 9-ema to rise up closer beneath current prices. However, as I've been saying for a number of weeks, these are not normal times. That drop back to test support hasn't happened and may not this week, but it's due.
Further potential support levels are marked. As with the SPX, if Dow prices slice through several successive layers of support marked on the chart, be careful. Those layers are thickened enough now by previous chop that they should hold. Something is wrong if they don't.
If the Dow rises before it tests support, I would watch first for potential resistance on daily closes--even if pierced intraday--at the top of its rising regression channel. Other indices pushed right through the top of their regression channels, but the Dow has not so far shown a propensity to do so.
Annotated Daily Chart of the NDX:
When all was said and done today, the NDX's "pause" today amounted only to a slowing of the gain. The NDX left a lower candle shadow that demonstrates how it sprang off its lows. That pause indicates indecision but nothing more yet. Candles such as Friday's and today's could be part of a reversal in the making, but the more days the NDX trends sideways with small-bodied candles, the more likely it is that overbought conditions are being burned off that way rather than by means of a sharp decline. Sooner or later, it will be time for the NDX to pull back to test the rising (red) 9-ema, but whether that happens immediately or not can't be determined from the chart.
Bulls want to see support on daily closes found somewhere in the zone comprised by the top of its former rising price channel and that rising red 9-ema, so somewhere between 2795-2820. Lower potential support levels are marked, if needed, as is a potential upside target above 2900.
As with the other indices, bulls don't want to see the NDX slice through several layers of potential support. It's chopped out some support zones that should have shaken out weak hands.
Annotated Daily Chart of the RUT:
Drawing a price or regression channel that supposedly contains the RUT's price action becomes an exercise in futility. Is the inner price channel, an automatically drawn regression channel, that's important? Rather, is it the outer one, a manually drawn price channel, that is correctly describing action? Has the RUT broken out of an important channel, that inner regression channel? Or, did it have a false breakout of the most important channel, the manually drawn one, with that breakout reversed today? Which describes the correct interpretation: running amok to the north or held back by resistance?
In cases like this, I retreat to my Keltner channels. The RUT has maintained daily breakouts above the Keltner channel that now converges with the rising red 9-ema. The RUT is in breakout mode with respect to this channel. Now it's time for the RUT to soon retreat and retest that 9-ema's support (weaker response) or trend sideways for a few days while the 9-ema rises closer underneath it slips lower to retest it (stronger response).
The RUT could as easily drop toward 842-848 as it could trend sideways long enough to catch a breath and then sprint toward the upper potential target. Readers should prepare for either eventuality.
Between 820 and 868.50, the RUT didn't churn as much as bulls might like, although there is some recent churn near 840-848. There's danger that if a downdraft got started, it could run further and harder for the RUT, but then that's always true for the RUT. It tends to overrun expectations either direction. That warning is pretty much a guarantee, anyway, that the RUT will be the most polite of the indices, stepping back only a little or rising only modestly, just to render that warning silly and unnecessary.
Readers might want to again put one of the financial indices, perhaps the BIX or BKX, on their radar screens, to serve as canaries in the coal mine. The BIX has been charging higher, but today it pulled back hard enough to reverse all Friday's gains. The RUT, in particular, is sometimes impacted by the behavior of the financials.
Annotated Daily Chart of the BIX:
Tomorrow's Economic and Earnings Releases
What about Tomorrow?
Let's look at intraday charts that might help us interpret action first thing in the morning.
Annotated 60-Minute Chart of the SPX:
The SPX, like other indices, produced breakout situations all the way up through most intraday time periods, scattering potential support lines here and there. Today, the SPX dropped back to the outer channel line. Will it break higher again, continuing the wild breakout momentum or will it slip back inside the channels that usually contain most movements? I've chosen the 60-minute charts to examine because the SPX's behavior with respect to the 60-minute 9-ema usually provides us with some clues as to whether it's performing in its strongest or weaker modes.
SPX prices had been either bouncing from or churning along its rising 9-ema, other than a brief excursion or two to test lower support. Today's action shows the SPX's consistent 60-minute closes beneath a turning-lower 9-ema. Whether or not you're interested in Keltner channels or even have the ability to view them, you can place a 9-ema or 10-sma or whatever you prefer on your charts. You can gauge whether each period closes with the SPX closing above, below or along that moving average, and determine the direction of the average, too, to make decisions about whether it maintains a trend. As of today's close, that short-term, intraday trend was down for the SPX.
However, a multitude of Keltner lines converge above and below the SPX's current prices. Support looks about as strong as resistance, and vice versa. Usually when this setup occurs, the SPX needs either a prolonged period of sideways churn to weaken support or resistance, or it needs a strong momentum move to break it out either direction. Higher and lower potential target zones are marked on the chart. They must be considered zones since these Keltner channels are dynamic and will move in the direction of the price movement.
In early price movement tomorrow morning, 1450 looks as likely as 1465-1468. Prices trapped mostly between 1456 and 1461 look as likely an action as a move toward either of those two targets. If the SPX heads for 1450 or 1465-1468, its behavior at those levels will determine whether it will get knocked back again or head for next potential targets, marked on the charts.
So far, the SPX's pullback looks like a possible bull flag, but as long as most 60-minute closes are beneath a turning-lower 60-minute 9-ema, the danger is that prices will collapse lower out of that flag formation rather than break higher.
Annotated 60-Minute Chart of the Dow:
The Dow's chart sets up the same way. Dow prices are mired in a confluence of support and resistance. It may take a strong momentum move--perhaps a gap at opening--to break the Dow out and head it toward either 13583-13593 on the upside or 13440-13452 on the downside. If no strong momentum move occurs, it might take several hours of trading tomorrow before headway can be made. Next potential upside and downside target zones are marked in case the Dow breaks through those nearby support and resistance zones.
So far, the Dow's pullback on this chart, like the SPX's, takes the shape of a possible bull flag. Also like the SPX, as long as most 60-minute closes are beneath the turning-lower 9-ema, there's danger that prices will collapse lower out of that formation rather than break higher.
Annotated 60-Minute Chart of the NDX:
The NDX's behavior looks obviously different when compared to the 9-ema, but the difference may not be significant. It spent the afternoon chopping back and forth across a flattening 9-ema rather than forming 60-minute closes beneath a turning-lower one. That shows a little more strength than the SPX's and Dow's behavior, so that its late-day push out up out of the afternoon's congestion zone might have seemed predictable. The NDX also had seemed mired in converging support and resistance, so we might consider the NDX to be the leader, showing us the direction the other indices might head next.
We might, but let's don't just yet. First, AAPL is driving the NDX around. Also, it's difficult to trust last thirty-minute developments. Let's reserve judgment until we think about what's happening on some of the other indices.
Let's look at what could happen tomorrow morning. Without sustained 60-minute closes above about 2353, the NDX looks as if it might slip at least to 2842-2848 again. If it continues this afternoon's break higher and can sustain 60-minute closes above the 2353 level, a retest of Friday's high might be in the works. Resistance on 60-minute closes could kick in as soon as 2858-2860, however.
If the NDX can break above Friday's high on sustained 60-minute closes, the daily chart provides the next potential upside targets. If it drops lower instead and begins sustaining 60-minute closes beneath a turning-lower 9-ema, further nearby downside potential targets are marked on the 60-minute chart.
This afternoon's late-day push followed AAPL's example, of course, so keep AAPL on your radar screen if you're trading NDX options, with that magic round-number 700 level beckoning above. Momentum runs can continue far longer than we think they can, but even AAPL will have to pause at some time.
Annotated 60-Minute Chart of the Russell 2000:
The RUT also followed its 60-minute 9-ema lower today, producing 60-minute closes beneath that average. The pullback from Friday's high is still of the type that might constitute a bull flag formation, and the RUT did its best to break out of that bull flag to the upside this afternoon, too, when the NDX was breaking out. I tend to distrust last-minute developments, but if the RUT gaps above its 9-ema tomorrow morning or pushes above it on strong momentum, it might reach for next resistance. That kicks in as soon as about 862 and continues up toward the top of the gap produced this morning and to Friday's high. If the RUT can break above Friday's high and sustain values there, the daily chart provides the next upside target.
As of the close, however, the converging resistance appeared to hold RUT prices. If the RUT moves down tomorrow, the next support might kick in anywhere from 854-856 or 850-854. If that 850 support doesn't hold on 60-minute closes, lower potential Keltner support levels are marked, too, with some of those converging with other types of support, such as historical support levels.
What does it all mean? On most indices, the daily charts show a pause only, and an expected one. That doesn't mean that such a pause can't be a part of something bigger, but those pauses on some indices are not yet showing anything more definitive. Notable exceptions to this "it's all expected and okay" outlook are the financial indices BIX and BKX, both of which erased all of Friday's gains, and the Dow Jones Transportation Index, which erased a big chunk of last week's gains. Since the BIX, BKX and $DJT figure among my canary-in-a-coal-mine indices, their action alerts me to be careful and study those next potential downside targets. Some other indices, such as the SOX and the $DJUSHB (home builders), reversed most of Friday's gains if not quite all, so there's reason to be cautious here without any real proof on indices such as the SPX or Dow.
On 60-minute charts, as we saw, the shape of the pullback looks like a potential bull-flag type formation, but the prices need to break out of those to the upside and charge to new highs before that bullishness is confirmed.
One of the good things about all the choppy price action over the last few months is that is has chopped out a number of possible support levels beneath current prices. The first jolt lower could be a jolt because the action over the last few weeks ran prices up fast, but below that initial jolt, many possible support levels exist. That provides some reassurance that weak hands have already been shaken out and that pullbacks will be just pullbacks, even if they drop prices to 38.2 or even 50 percent of the fun-up from the early August lows.
However, that assurance will evaporate if price action starts slicing through too many of these potential support levels being pointed out on daily charts.