Market Internals

Introduction

When bond markets are closed, as they were today, equities sometimes wander without direction. We saw something like that today.

The SPX gained 0.01 percent; the Dow lost 0.00 percent or $0.23; and the NDX lost 0.05 percent. The RUT dropped 0.14 percent. Financials as characterized by the BIX (up 0.16 percent) and BKX (up 0.17 percent) indices produced small-bodied candles for the day, indicative of indecision. The SOX (up 0.09 percent) also produced a small-bodied candle indicative of indecision. Commodity futures such as gold, silver and crude produced small-bodied candles, too, but small-bodied red candles that showed lower closes than opens. Volatility indices such as the VIX and RVX turned lower, with fear perhaps assuaged by today's action. Not all indices produced small-bodied candles, however. After pre-market reports by two homebuilders, the homebuilders as characterized by the $DJUSHB dropped 3.97 percent.

The aimlessness might have constituted further indecision after last week's weakness. We've heard all sorts of theories about why the equities were weak last week. Most of those theories pinned the downturn on the outcome of last week's elections and fears about the fiscal cliff. However, the levels hit last week were set as potential targets well ahead of the elections on some of the indices, as you'll see if you review my Monday Wraps from several weeks past.

Last week's downturns were possible on other indices, too, if certain conditions were met, and those conditions were met. What did I suggest we should be watching to alert us? Not the election results or fiscal cliff negotiations alone: it was the dollar's chart.

Daily Chart of the Dollar:

The dollar hit a slightly higher low in the middle of October and has been steaming higher since then. We don't always see the same inter-market relationships among the dollar, equities, and commodities. However, in recent times, a climb in the dollar has meant a downturn in the equities--and therefore, equity indices--and commodities.

Many geopolitical and economic forces impact currencies, and the impact on the dollar extends beyond our borders, our elections and our fiscal cliff discussion. When Japan faces its own fiscal cliff and Europe deals with a crisis, we could be considered the safe haven despite our own very real difficulties. The dollar could rise, or, rather, continue to rise.

Today, PIMCO's CEO Mohamed El-Erian labeled concerns about the U.S. fiscal cliff as overblown. A Bloomberg video characterized money managers across the globe as believing that the U.S.'s economy is strengthening. Our dollar's strength may be reflecting these impressions. Until and unless these inter-market relationships shift, dollar strength tends to send U.S. equities and commodities lower, although I wouldn't use that information as a market-timing tool.

I'm no currency guru. I'm certainly not privy to the conversations going on as European finance ministers or our own politicians meet. I do know that the dollar's behavior sometimes telegraphs a next move in equities or else validates a move already begun.

The dollar approaches a 50-percent retracement of the decline off the 84.245 high from July, with that 50 percent retracement at 84.485. That's a level from which we might naturally expect some resistance. Will the dollar punch through that resistance or will it pause or pull back? If the dollar does pull back, will the pullback be minor, ahead of another attempt at that resistance or will the dollar roll back down through the 80.76-80.80 level and give equities some breathing room? I don't know the answer to that question, and the answer will be predicated upon what goes on both within and outside our borders.

Last night, Asian bourses turned in mixed performances. After a report that exports rose to a five-month high, China's Shanghai Composite gained 0.49 percent. This gain occurred despite some naysayers who argued that the report was an outlier due to be reversed by the geopolitical and economic hurdles ahead. Other reports in China had not been as cheery, with both new loans and M2 money supply lower than expected.

The same report that revealed that China exceeded export expectations showed that exports to Japan slowed. Japan's preliminary GDP also dropped more than expected, to -0.9 percent. Last night, the Nikkei 225 lost 0.93 percent; the Hang Seng gained 0.21 percent, and the Straits Times slipped 0.07 percent.

Headlines last night trumpeted the passage yesterday of Greece's 2013 austerity budget. This budget follows last week's parliamentary vote on a separate bill detailing tax hikes and spending cuts for the next two years. The passage of that budget yesterday only narrowly beat the opening of a meeting of eurozone finance ministers in Brussels that began yesterday and extends through tomorrow.

Monday's Developments

By this morning, the Troika had finally delivered its report on Greece, and that report was due to be discussed at that meeting of eurozone finance ministers. Eurogroup President Jean-Claude Juncker warned market watchers not to expect any final decisions to come out of Monday's meeting, however. I saw no details coming out of the meeting before this article was sent for publication, but you might check for news tonight and tomorrow morning.

The consensus today was that Greece has at least made progress in resolving its difficulties, opening up the possibility that the country could soon receive its next disbursal of financial aid. Bloomberg reports that a draft report that it reviewed noted "very large risks" in the bailout program although Greek Prime Minister Antonis Samaras's government was given credit for catching up significantly.

It's anticipated that the meeting this week will result in an agreement to issue enough funds to prevent a default November 16, when 5 billion euros of bills mature. As to the greater bailout funds eventually needed, they're now estimated as being as much as 32.6 billion euros ($41 billion) through 2016. This points to a possible two-year extension of aid. There's this little problem, however, among the Troika of the European Commission, the European Central Bank and the International Monetary Fund: who will provide the money needed?

The economy might be picking up in the U.K., the Organisation for Economic Co-operation and Development (OECD) said today, or at least it might pick up in the next six months. The OECD's composite leading indicators suggest that the U.K.'s economy should grow at or above trend. The OECD is credited for predicting the downturn in the U.K.'s economy before it occurred, so this news of a possible uptick is cheering.

Meanwhile, Lorenzo Bini Smaghi, a former executive board member of the European Central Bank, reportedly claimed that Spain needed a bailout "yesterday" and should ask for one immediately (CNBC). With the ongoing meeting in Brussels keeping the dangers front and center while the U.K.'s prospects of climbing out of recession just might be looking a bit rosier, European bourses turned in mixed performances.

Spain's IBEX 35 fell 0.90 percent. Yields on Spanish Government 10-Year Notes rose 0.6600 to 5.89 percent, inching back toward a test of the 6.06 percent closing level from September 26. The FTSE 100 percent rose 0.11 percent; the DAX inched up 0.07 percent; and the CAC 40 dropped 0.35 percent.

In the U.S., story stocks today included some of the homebuilders, announcing earnings before the bell. Those included Beazer Homes USA (BZH, 13.77, down 2.87 or 17.25 percent) and DR Horton (DHI, 19.40, down 1.20 or 5.83 percent).

BZH gapped lower after its earnings report. The company reported a loss of $2.82/share, lower than the year-ago loss but far worse than the predicted $1.22/share. Revenue, at $370.9 million, beat both its year-ago level of $334.90 million and its prediction of $335.1 million. The company's president pointed to growth in orders, closings and backlog, and--something analysts had warned to watch--gross margins. For the last two months, analysts have been raising expectations for the next quarter. Investors apparently weren't impressed.

DHI also saw rising margins. For the quarter, the company reported earnings of $0.30/share, up from the prior $0.11/share and also above the expected $0.28/share. Revenue rose to $1.3 billion, more than the anticipated $1.19 billion. The chairman of the board credited improvement in both the housing market and the company's performance. Analysts have been pushing estimates for the company's next quarter higher over the last three months.

As is typical, Apple (AAPL, 542.83, down 4.23 or 0.77 percent) stepped into the lineup of story stocks today. The company announced a licensing agreement with HTC Corp. that would stop legal wrangling over patents.

Research in Motion (RIMM, 8.81, up 0.27 or 3.16 percent) had an announcement, too. The company announced an event to launch a new Blackberry 10 mobile operating system. That event is currently scheduled for January 30, 2013.

Another big announcement today was a joint one, issued by Jefferies Group (JEF, 16.27, up 2.00 or 14.02 percent) and Leucadia National Corp. (LUK, 21.14, down 0.66 or 3.03 percent). The two announced a merger. In this all-stock deal, JEF's shareholders will receive 0.81 of a share of LUK common stock for each share of JEF common stock they own. This does not include LUK's previously owned shares of JEF, with LUK already owning 28.6 percent of JEF's outstanding stock. Both companies' shareholders have to approve the deal. If that and other closing conditions are met, the deal is expected to close the first quarter of next year. JEF's CEO and Chairman Richard Handler will also become CEO of LUK and one of its directors. LUK will continue to pay dividends, but they will be paid quarterly.

Late on Friday, Celgene Corporation (CELG, 75.66, up 4.16 or 5.82 percent) unveiled results of clinical trial for late-stage pancreatic cancer, showing that it's drug Abraxane improved survival rates. The release of this information had been unexpected and not all the details will be available until January, but today was the first time for the stock to react. Experts have been extrapolating what they know about how Abraxane has worked in treatment for lung cancer and melanoma to approximate what kind of improvement in survival might be seen in that trial for pancreatic cancer, but no one knows if those approximations are correct.

Clovis Oncology, Inc. (CLVS, 12.50, down 8.99 or 41.83 percent), on the other hand, suffered a disappointment. It halted development of a cancer drug that did not improve overall survival rates from those in standard chemotherapy for pancreatic cancer.

Gilead Sciences Inc. (GILD, 73.93, up 8.92 or 13.72 percent) joined the group making announcements. GILD announced that a hepatitis C virus was cleared in 100 percent of patients in a trial involving a combination of its experimental therapies.

Verizon Wireless said late today that it would pay Verizon Communications (VZ, 42.56, down 0.08 or 0.19 percent) and Vodafone Group Plc (VOD, 26.39, down 0.17 or 0.64 percent) distributions of $8.5 billion on or before December 31. The two are 55 and 45-percent owners, respectively, of Verizon Wireless. The two parent companies were up $0.18 and $0.06, respectively, from their closing values in after hours trading as this report was prepared.

An article in a French daily today quoted Microsoft Corp's (MSFT, 28.22, down 0.61 or 2.12 percent) Chief Executive Steve Ballmer as saying that the new Surface tablet had a modest launch. The Surface has limited availability.

The tax man cometh for some multinational companies. U.K. lawmakers said today that Amazon (AMZN, 226.47, up 0.16 or 0.07 percent), Google (GOOG, 665.90, up 2.87 or 0.43 percent) and Starbucks (SBUX, 50.68, down 0.28 or 0.55 percent) should be paying more taxes. Germany joined the U.K. last week in asking that loopholes be closed.

Trina Solar (TSL, 3.65, flat) updated its guidance for the quarter that ended September 30. Instead of shipping 450-480 MW of solar modules, it estimates those shipments to be between 375-385 MW. It lowered margins to a range of 0-1.5 percent. The company blamed "irrational pricing practices by some competitors," as well as high inventory levels and "continued supply-demand imbalance in the global PV industry."

How about a story sector? Today, the International Energy Agency predicted that by 2020, the U.S. will beat out Saudi Arabia as the world largest oil producer.

The IEA pointed to a "resurgence in oil and gas production in the United States" (Marketwatch). The IEA further predicted that the U.S. would become "a net oil exporter by around 2030." I'm certain Jim Brown will soon give his take on this report with his knowledge of this sector much broader than mine. Last year, the IEA had made a different prediction, pointing to Russia as Saudi Arabia's next challenger for top position, but the Energy Information Administration notes that U.S. energy production has increased 7 percent since that last IEA report.

Let's look at daily charts for some of the indices. You'll see that we indeed have a cliff-hanger, but I'm not referencing the fiscal cliff. I'm referencing that cliff that has been visible on the charts, irrespective of elections and political discussions, for quite some time.

Charts

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:

Last Monday's Wrap warned that the SPX had set a potential downside target of "about 1386-1400," where support might exist on daily closes. The SPX of course dipped even lower than that downside target, but it had, in the meantime, also driven potential support on daily closes lower. Friday's candle was one of indecision, small-bodied with both upper and lower candle wicks, and today's was another candle indicating indecision. It's time for the SPX to bounce now and show that the indecision was a prelude to a bounce. The longer the SPX trends sideways, the more risk there is that this is instead a different kind of prelude, and that the next move will be a continuation of the downdraft.

Consistent daily closes beneath last Thursday's low risk setting a potential target that's currently near 1290. I've had those ominous red rectangles at the bottom of these daily charts for a while. When Keltner channels are set up as they are, with no intervening Keltner channel lines between target-setting level and target, the move can sometimes be swift. Be aware of that possibility.

Other possibilities exist, of course. While there might not be Keltner support between here and there, we can see much chop as the SPX was making its way uphill a few months ago. Those choppy zones seen on the left-hand side of the chart perhaps offer some interim support that could slow or stop any decline.

The other possibility, of course, is that the dollar could find resistance and turn down, European finance ministers could tidy up the November 16 issue for Greece, our politicians could sling their arms around each others' shoulders and equities could turn higher.

If so, watch for potentially strong resistance for the SPX at the declining red 9-ema. It's not until and unless SPX prices consistently close above that 9-ema that bulls can breathe a little easier. Watch for rollover potential from that moving average, then. Potential further upside targets and resistance levels are marked on the chart for that possibility that the SPX could vault over the 9-ema again and stay above it on daily closes.

Annotated Daily Chart of the Dow:

A similar setup is visible on the Dow's daily chart, with some slight differences. The Dow has violated the channel boundary that sets a new target. If one is a stickler for technical setups, the Dow has set a potential downside target at the lower red rectangle. However, its violations of that channel boundary have been slight and few on daily closes. This whole setting-of-the-target is tentative in this case, in my opinion, especially given the climb in the Dow's sister index, the Dow Jones Transports (^DJT) today. I don't like to bet that the Dow will continue long in one direction if the Dow transports are moving the other direction, so keep the transports on your radar screen.

If the Dow is going to avoid definitively setting that downside target, it needs to bounce and do so quickly. It needs consistent daily closes above the descending red 9-ema and, preferably, also above about 13090-13100 resistance. If the Dow makes it through that resistance, it will soon face other resistance, but at least consistent closes above the top orange resistance band will lessen the chance that it will keel over and barrel toward its next potential downside target.

Annotated Daily Chart of the NDX:

Like the Dow, the NDX has already set a potential downside target at the lower red rectangle. Like the Dow, the breaks of Keltner channel support have, with the exception of last Thursday's, been small. Investors in NDX composite stocks, however, need to buy and push the NDX back above the descending red 9-ema to lessen the chance that the NDX will keel over and run down toward that lower target.

If the NDX bounces, the red 9-dma will be a source of potential resistance on daily closes, with resistance stretching up to about 2650. If the NDX can bounce and maintain daily closes above that nearest resistance zone, higher potential targets and resistance levels are marked on the chart.

Annotated Daily Chart of the RUT:

You'll see a new horizontal black line on the RUT's chart. As the annotations explain, this line marks the beginning of a bad week for the RUT in early August 2011. The previous week, the RUT had closed at 797.30. That first week of August 2011, the RUT barreled down to an intra-week low of 698.60, although by the end of the week, it had bounced and managed a close at 714.63.

Ouch.

It's not my intention to scare anyone, but the Keltner setup points out a potential downside target that seems unlikely. I have mentioned in recent Wraps that the setup is one that sometimes predicts a quick movement toward that next target, and that example from the summer of 2011 proves that this kind of behavior can and does happen. I'm not predicting that it will this time, but I am asking subscribers to examine their trades and know how they would adjust and/or hedge them if indices should keel over since the possibility does exist. Especially if you have traded less than a year, you won't have experienced such a downdraft, so be careful with the risk you take on in new trades or add to current ones.

The RUT has not yet set that downside target, but I would be worried if we see a long red candle this week that isn't quickly reversed, leaving a long lower candle wick behind at the close.

As has been true for other indices, while the Keltner setup might not show a stopping place between here and the lowest target, if that should be set, the chop from previous months, visible on the left-hand side of the chart, does show many potential stopping places. That time that the RUT barreled lower in the summer of 2011, for example, what we would have seen on the left-hand side of the chart was a fast move higher without much chop to provide landing places or little ledges to break the fall.

If the RUT bounces, first resistance will be where it is for all the indices--at the descending 9-ema. The RUT has a resistance band that begins with the 9-ema but extends up to about 822, so it's difficult to predict where resistance might kick in and how far the RUT could drive through that converging potential resistance. The RUT needs to make it back above that 9-ema and probably back above about 812-813 on daily closes before RUT traders should breathe too easily, however.

Tomorrow's Economic and Earnings Releases

Many retailers appear on the list of companies reporting earnings tomorrow: KSX, HD, KORS, SKS, and TJX all report before the open. Many market watchers will also be watching the stock that could in the past move the markets with its reports. CSCO reports after the close. The conference call will be important, too, as market watchers are beginning to whisper of a possible lowered guidance from the company. BBY and HUM will also hold analyst/investor days tomorrow.

The biggest news may be that coming out of Europe, however, as that November 16 due date looms for Greece.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

Late last week, the SPX had been skiing downhill on a sharply declining Keltner channel system, even breaking through the crust at one point last Friday. Today, the SPX steadied. While it had been mostly turned back at each test of the 9-ema's resistance, today it traded back and forth across a flattening 9-ema on the hourly chart. Support beneath it strengthens just a tad, too. The SPX is no longer in breakdown mode on the one-hour chart.

That tentative improvement is just that: tentative. Traders hoping for improvement don't want to see the SPX gap below or move quickly below Friday's low tomorrow morning unless it quickly reverses back above it. Breaking down again, especially below Friday's low, would put the SPX back into breakdown mode on this chart. As you can see, no further channel lines on this chart, at least, offer support beneath that level, so we would hope for historical or other support to kick in.

What if the SPX doesn't gap tomorrow? With the current setup, it's typical for the SPX to either find support almost immediately on any dip or to rise to test the top of its smallest Keltner channel, the grey line just above the current level. That grey channel still turns lower, so those hoping for higher prices would want to see the SPX maintain higher prices--and, specifically, 60-minute closes above the 9-ema--long enough to turn that channel higher again. If the SPX can do that, higher potential targets and areas of potential resistance on 60-minute closes are marked on the chart.

Annotated 60-Minute Chart of the Dow:

The Dow's setup is nearly identical. The current setup favors support just beneath the Dow holding on any dip or else prices climbing up to test the top of the Dow's smallest, grey channel. However, a gap lower or swift move below Friday's low tomorrow morning that isn't quickly reversed would again put the Dow into breakdown mode on this chart.

If the Dow steadies and climbs, potential upside targets and resistance levels are marked. A strong or prolonged climb will move those Keltner channels in the direction of the move, however.

Annotated 60-Minute Chart of the NDX:

The NDX's chart shows some similarities but isn't identical. Support isn't flattening beneath the NDX in quite the same way but is still sliding lower. The setup favors testing support at least as much as it does rising toward the top of its smallest Keltner channel to test the resistance there. As with the other indices, a gap lower tomorrow morning or a swift move lower that isn't almost immediately reversed puts the NDX into breakdown mode on this chart.

If the NDX can instead move higher with pullbacks that are shallow enough to turn Keltner channels higher again, it has a better chance of punching through resistance and stabilizing. Potential next upside targets and resistance levels on 60-minute closes are marked on the chart. Those hoping for strength want to see the 9-ema turn higher and the NDX to form consistent 60-minute closes at or above it.

Annotated 60-Minute Chart of the Russell 2000:

The RUT's setup shows similarities to the others, but some differences exist, too. The RUT produced many 60-minute closes beneath the widest Keltner channel band today. It hasn't convincingly pulled up out of breakdown mode on this chart.

This is the RUT, however, which tends to overrun boundaries, so we'll give the interpretation a little wiggle room. However, those hoping for price gains do want to see the RUT gap or immediately drive higher tomorrow morning: they want to see it gap back above that resistance that's been pressuring it lower all day, the middle-sized purple channel in this case. I know that few of you follow this Keltner setup, so the 9-ema that converges with this other resistance serves as a good proxy. Even the most rudimentary charting systems provide the opportunities to slap -ema's on charts.

The RUT needs consistent 60-minute closes above a turning-higher 9-ema to start pointing to even tentative strength. Potential upside targets and resistance levels are marked on the chart in case it can do that.

What happens next? The daily charts are hold-your-breath scary. Indices are perched on support that absolutely needs to hold. But "perch" they did today. Whether they're building a base from which to launch the next punch up to test resistance or only resting before stepping off into thin air remains to be seen. We in the U.S. may not be in charge of when that happens, as there is much to come with more news about the Troika's report, the finance minister's decisions about Greece, and heightened concerns about Spain and Cyprus, too.

I switched to the 60-minute charts for intraday charts to avoid some of the noise of the shorter-term charts. Some of the 60-minute charts show some hope that indices will attempt climbs although they do not promise either the climb or a positive result from any such test. We just have to wait and see now.

We've had plenty of warning when viewing charts on these Monday Wraps about potential downside and potential upside targets. I prefer to look at both upside and downside risks to my trades, and I think you should be doing the same.

Now is not the time to size up in your bets on options trades. If you can't sleep at night, you've already sized up too much, so look at ways to reduce your exposure until you can sleep again.