Market Internals

Introduction

Equities caught a breeze today and soared like kites. The dollar eased lower after its quick run up from its $78.72 low on October 17, helping provide the lift under those kites. Economic reports added to the breezy excitement.

Commodity futures such as gold (/GC), silver (/SI), and crude (/CL) flew high on the breeze, too. Those kites were sent aloft without regard to ongoing conflict in Gaza or a looming report in Europe, although some expressed hope today that some type of peace agreement was being negotiated to address the situation in Gaza.

The SPX gained 1.99 percent; the Dow, 1.65 percent; and the NDX, 2.43 percent. The RUT rose 2.16 percent, and the SOX, 2.01 percent. The home construction industry, as represented in the $DJUSHB, gained 1.03 percent. Financials as represented by the BIX and BKX gained 1.61 and 2.23 percent, respectively. Energy stocks tended to perform well, and some commentators were noting strength in the materials sector, too. For example, IP gained 3.73 percent. X gained 5.43 percent.

Are all those kites still tethered to the ground somewhere far below, however? Goldman Sachs analysts, led by Chief U.S. Equity Strategist David Kostin, issued a strategy note saying that the SPX could fall another 8 percent by the end of the year. Kostin appeared to put little faith in politicians to resolve all fiscal-cliff issues by the end of this year, leading to uncertainty in the markets over the coming weeks. He did believe the issues would eventually be resolved and the fiscal cliff avoided, and he expressed his belief that once those issues were dealt with next year, the SPX would end 2013 at 1575.

Monday's Developments

Japan would certainly like to see our dollar turn back around and move higher. Forex forums are chattering about efforts Japan has made and is willing to make to weaken the yen against the dollar and other currencies. With hopes that the next election will usher in officials that will do all they can manage to depress the yen, the Nikkei 225 led other Asian indices higher last night.

As with our equities lately, a weaker yen generally supports equity prices in Japan, especially those of exporters. Currency markets aren't always so easily controlled, but last night, the Nikkei 225 gained 1.43 percent; the Hang Seng, 0.49 percent; and the Straits Times, 0.18 percent. After disappointing real-estate data, China's Shanghai Composite spent most of the night underwater. A strong end-of-day push managed to close it up 0.11 percent.

Ahead of tomorrow's Eurogroup meetings and after reassurances offered this weekend concerning our fiscal cliff, European bourses rallied, too. European investors and traders were also repositioning trades ahead of tomorrow's Eurogroup meeting concerning Greece. The FTSE 100 gained 1.06 percent; the DAX, 1.14 percent; and the CAC 40, 1.69 percent. Spain's IBEX 35 gained 0.89 percent.

Today's two economic releases both dealt with housing numbers. Market experts predicted that existing home sales would remain near the prior 4.75M, inching up to 4.76M. Instead, the number climbed higher, to 4.79M.

The National Association of Home Builders expected its diffusion index to stay steady at 41. This diffusion index has been climbing steadily off its June 15, 2011 level of 13. It hasn't been above the 50 level for many years, so today's much-higher-than-anticipated 46 seems tantalizingly close. The NAHB termed this a "solid five-point gain" and noted that this is the seventh consecutive month of gains. The diffusion index might not have hit that elusive 50 yet, but it did hit its highest number since May 2006, the NAHB reported.

The NAHB pointed to shrinking inventories of foreclosed and distressed properties across the country, with that tightening supply resulting in the increasing demand that builders reported. Builders are now moving forward with purchases, the NAHB further reported. Current sales conditions rose eight points to 49, and sales expectations for the next six months rose to 53. Traffic of prospective buyers stayed steady at 35. All four regions of the country posted gains.

Wal-Mart (WMT, 69.02, up 0.99 or 1.46 percent) figured among the story stocks today. This weekend, the Wall Street Journal discussed the action the company took last Thursday when it filed an unfair-labor-practice complaint against the UFCW. WMT claims the union is behind worker protests at its stores, and WMT is attempting, with this filing, to avert protests during the busy Thanksgiving holiday.

Intel (INTC, 20.25, up 0.06 or 0.30 percent) also took its place among the story stocks today. CEO Paul Otellini announced plans to retire in May.

MetroPCS (PCS, 11.00, up 0.24 or 2.23 percent) saw a boost in trading. Last month, we learned of a T-Mobile deal. This morning, PCS filed stockholder meeting proxy materials that suggested that T-Mobile shareholders will likely approve the merger.

What would a list of story stocks be without mentioning Apple (AAPL, 565.73, up 38.05 or 7.21 percent)? Today's gain marked its second-highest one-day dollar gain, Fortune noted. Despite making a list of "top insider sells," AAPL's 505.75 and 28.27 drop off its September 21 high last Friday was apparently a close enough approach to 500 to encourage buyers to buy or shorts to cover. When I look back at the October 22 Wrap, the last time I think I posted an AAPL chart, it looks as if AAPL was then teetering on the edge of setting a 530 downside target, and that one had already been exceeded. Now the chart setup suggests that AAPL needs to maintain daily closes above about 548 on any pullbacks or it risks retesting last week's low.

Reporting companies included Lowe's (LOW, 33.96, up 1.98 or 6.19 percent) and Tyson Foods (TSN, 18.72, up 1.84 or 10.90 percent), reporting before the open this morning. LOW reported earnings of $0.35 a share on revenue of $12.07 billion, against expectations of $0.35 a share on revenue of $11.92 billion. Gross margins increased to 34.32 percent from a prior 34.06 percent.

TSN reported earnings of $0.55/share on revenue of $8.37 billion, compared to anticipated earnings of $0.44/share on revenue of $8.49 billion. Those were adjusted diluted EPS figures, but the comparison number seemed to be for adjusted diluted EPS figures, too. The full-year figure showed a similar pattern: EPS that beat and revenues that disappointed. The company projects that chicken and beef profits next year will be below the normalized range; pork profits, above the normalized range; and prepared foods segment profits, within the normalized range. Along with reporting earnings, TSN declared a special dividend of $0.10/share and raised the regular dividend by 25 percent.

Agilent (A, 37.51, up 1.70 or 4.75 percent) reported today after the close. The company earned $0.86/share on revenue of $1.77 billion, with both numbers beating expectations of $0.80/share and $1.76 billion. However, the price headed lower in after hours trading due to guidance that disappointed. As this report was prepared, the price had dropped $0.90 or 2.40 percent from the closing price.

Other late-day reporting companies included Urban Outfitters (URBN, 37.07, up 2.02 or 5.76 percent), Brocade (BRCD, up 5.54 or 5.32 percent) and Nuance Communications (NUAN, 21.57, up 1.22 or 6.00 percent), all heading lower in after-hours trading as this report was prepared. URBN missed EPS expectations but beat on revenue, and was knocked back $0.77 or 2.08 percent off the closing price in after-hours trading. BRCD beat on both, but was $0.21 or 3.79 percent off its closing price in after-hours trading. NUAN missed on revenue but beat on EPS and had dropped $0.67 or 3.11 percent below its closing price as this report was prepared.

Market bulls might have had a good day, but former AIG chief executive Hank Greenberg and his Starr International Co. didn't. U.S. District Judge Paul Engelmayer in Manhattan dismissed Starr's $25 billion lawsuit against the Federal Reserve Bank of New York. The suit had claimed that the bank had, in 2008, unlawfully constructed a back-door bailout of AIG. The judge didn't agree.

Some of you will be glad to know you still have a chance of bagging those Twinkies and Ding Dongs. Late in the day, the company announced that Hostess and the union had agreed to mediate.

Let's look at daily charts and see what we can see. You'll notice one thing that you can't see: the former rising channels through which the indices had been climbing off the summer lows. The indices have fallen out of those channels. I thought it was time to clean up the charts. On some charts, I have left the last, smaller descending channels through which they had been pulling back, as it's possible that the former support lines of those channels will now prove to be resistance if they're retested from below.

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 week, the SPX followed its continued daily closes beneath the 9-ema by falling beneath Keltner channel support and setting a potential downside target at the red rectangle at the bottom of the graph. What does the SPX need to do to unset that target? Technically, it needs to form consistent daily closes back above the central average in all these nested Keltner channels, the green 120-ema.

For now, it was time for the SPX to attempt to move back up through its smallest Keltner channel. The SPX hasn't closely approached the top of that grey channel since the middle of October. A bounce back up through the channel is long overdue, expected, and not a particular sign of strength just yet, although it would be silly to deny the strength of today's rally at least.

That smallest channel's upper boundary is now converging with the green 120-ema, so the test will be telling, if it occurs. The 1397-1410 zone could be significant resistance on daily closes if it is approached. Right now, that chart looks as if the SPX could shove through any resistance, but bulls need to see consistent daily closes above that zone before they breathe too easily.

As or before the SPX can manage that test, though, it has to manage the one it's currently undergoing: it needs to produce consistent daily closes back above the red 9-ema, turning that average up again and then bouncing from that average on each subsequent pullback. One day's close above that average, when the index hasn't yet had a chance to pullback and retest its support, doesn't constitute a confirmed change in short-term tenor, although the impressive distance that the index moved above that moving average certainly warrants some respect.

A test of the 1397-1410 zone looks possible. So does a decline back to test last week's low. If I knew what will be said during tonight's Bank of Japan statement or decided at tomorrow's Eurogroup meeting, I could perhaps hazard a guess as to which we would see. For most of the day, the two choices looked about equally likely, but the end-of-day push this afternoon, when shorts finally gave up and covered, made the move toward next resistance look more likely. When a "look" has been produced by EOD short covering ahead of potential market-moving developments, it's not as comfortable to make judgments based on the candle that was produced. Let's reserve judgment until we look at intraday charts, too.

Further potential upside and downside targets are marked on the chart.

Annotated Daily Chart of the Dow:

The Dow also finally fell through channel support, setting a potential downside target at the lower red rectangle. The break was sharp and resulted in a painful decline, but one that did find support where there had been prior congestion on the way up in the summer and early fall. It was one of those "ledges" that I mentioned last week, that might break the fall of the indices so that they didn't drop in one fell swoop to the lower target.

As with the SPX, it has been a long time since the Dow has closely approached the top of its smallest, grey-colored nested Keltner channel. It's about time it did. This could be the time when the Dow rises to retest that resistance.

In another congruence with the SPX's chart, that upper-channel boundary's potential resistance now converges with even stronger potential resistance. That stronger potential resistance lies at the 120-ema and round-number and other resistance, all now converging from about 13000-13100. The Dow needs consistent daily closes above this potential resistance zone before it erases that much lower potential downside target at the red rectangle.

First, however, it needs to sustain daily closes above the red-9-ema long enough to turn that average back up again. Then it needs to bounce from that moving average on subsequent pullbacks.

The SPX's setup seemed to slightly favor the SPX rising to test its 120-ema over falling back to retest last week's lows, even if that picture was partly produced by EOD short covering. The Dow's picture looks about the same, although the resistance band tested today, including the red 9-ema, does appear to be just a little stronger on the Dow. The Dow did not as convincingly clear that moving average today. That can be fixed tomorrow, but for now, that resistance seems to stalled the Dow's run up today, as impressive as it was.

Additional potential targets are marked on the chart, but it still looks as if the short-term bullish and bearish cases are about equally weighted.

Annotated Daily Chart of the NDX:

Now that's a gap! The NDX gapped up and quickly ran higher to retest and exceed its red 9-ema today. It's about time for the NDX to retest the top of its smallest grey channel or at least approach the top. The NDX is going to need to sustain daily closes above that 9-ema long enough to turn it higher before it's showing even the slightest change in tenor. It needs to then bounce from a rising 9-ema on subsequent pullbacks.

That action will allow a little easier breathing on the part of bulls in NDX stocks, but the NDX has other difficult challenges ahead, with potential targets and resistance zones marked on the chart.

For now, it looks slightly more likely that the NDX will rise up to test at least the nearest resistance than it does that the NDX will immediately turn down and retest last week's low. However, that picture was at least partially colored by the EOD move and it could be erased by a gap lower or quick move down tomorrow morning.

Annotated Daily Chart of the RUT:

The RUT gapped up, too, to retest a configuration that it fell through last week. On a Keltner basis, consistent daily closes above the red 9-ema will set up a potential retest of the 806-813 zone. However, I've left a former descending channel and horizontal resistance line in place, converging as they do just below 800. Some traders will certainly be watching those levels, so nearly approached today. Weak hands might be anxious to sell on a bounce if it stalls in that zone, so RUT traders might want to formulate a plan for how they'll handle tests of that possible resistance, too, if they have bullish profits to protect.

A sharp move below 783 or maybe even 789 that isn't reversed within a few hours sets up a potential retest of last week's lows. Other potential targets and their concurrent potential support/resistance levels are marked on the chart.

Annotated Daily Chart of the Dollar:

Last week, I noted that the 50 percent retracement of the dollar's move from the 84.245 July high to the 78.725 September low would be a level I would be watching for potential resistance. Last week, the dollar slightly exceeded that 50 percent retracement level but then pulled back sharply by the end of the day. Dollar futures extended the pullback today but so far, held support at the 38.2 percent retracement level.

Although I have not included the Keltner channels here so that the Fibonacci bracket can be more easily seen, potentially strong Keltner support is converging beneath the 38.2 percent Fib level currently being tested, with that support converging from about 80.50-80.75.

The dollar's pullback has not yet violated any important support. It's unclear whether this is just the expected possible pullback before another push higher, at least to retest the 50 percent retracement, or whether the dollar will break through support. As I suggested last week, it's not all up to us, either. Decisions made in Europe tomorrow and in Japan tonight and in the coming weeks are just two of the geopolitical developments that could result in dollar strength or dollar weakness.

Although this isn't a seesaw we can count on, usually when the dollar drops, U.S. equities and commodities climb. When the dollar climbs, they tend to do the opposite, although that seesaw could be replaced with a relationship that works differently, depending on the reason for the dollar movement.

Tomorrow's Economic and Earnings Releases

Current FOMC voting member Jeffrey Lacker, President of the Federal Reserve Bank of Richmond will be speaking at the Shadow Open Market Committee's Fall Symposium in New York. A Q&A session is planned, and I would anticipate some market volatility questions with that speech title and with the FOMC chairman due to follow a few hours later. Chairman Ben Bernanke will also be in New York, speaking at the Economic Club, with his speech title a more pedestrian sounding "The Economic Recovery and Economic Policy." A Q&A session is planned there, too.

However, we have to be aware that both Japan's rate decision and policy statement and the Eurogroup meetings have the potential to roil our markets, too. A week or two ago, chatter among currency groups was that Japan was active in the currency market, acting to keep the yen low against the dollar and other currencies. Articles about the upcoming election in Japan emphasize the point that debates over currency issues and easing policies are of primary concern in the election. I don't have to tell you why the Eurogroup meetings might be important.

Companies reporting earnings tomorrow include BBY (BMO), CPB (BMO), CHS (BMO), DSW (BMO), HNZ (BMO), HPQ (BMO), HRL (BMO), KIRK (BMO), and MDT (BMO), among others.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

By Friday afternoon of last week, the SPX was beginning to find support on 60-minute closes back above the 9-ema, with that moving average running higher again. Although that signal can't always be trusted to produce higher prices (see last Tuesday's candles, for example), it was the minimum traders needed to see to believe that anything at all had changed over the short term.

Now the SPX has closely approached potentially strong resistance on this 60-minute chart, marked by the orange rectangle just ahead. It would be natural for the SPX to now either trade sideways as it tests that resistance and gathers strength to push through it, or to fall back and plumb for support again. If the SPX falls back, bulls want to see it find that support on 60-minute closes on the rising 9-ema. Otherwise, the SPX risks dropping back down into the congestion zone from last Thursday and Friday to retest the support there. Bears want this to happen and for that support to fail.

If the SPX should gap or shoot higher above the next resistance zone tomorrow morning instead of falling back, bulls want to make sure prices hold higher through tomorrow's Eurogroup meeting. One source listed a possible 11:00 EST announcement time, but I could not verify that information on any other source and I'm not sure that source was reliable. If the SPX can maintain 60-minute closes through the volatility surrounding any announcements coming out of the Eurogroup meetings, the next potential upside target is marked on the chart.

Annotated 30-Minute Chart of the Dow:

The Dow's candle bodies were also grouping just above a rising 9-ema by Friday afternoon of last week. Today, that moving average provided the base from which the Dow launched. Those who want to see the Dow continue making headway to the upside want to see the Dow find support on 60-minute closes on that rising 9-ema.

Unlike the SPX and some other indices, the Dow did not closely approach its next target today. That potential resistance on 60-minute closes may prove to be strong, so watch for a possible stall in that zone unless the Dow just gaps above it or powers through it in one quick thrust.

A failure to hold the support of the rising 9-ema on 60-minute closes may set the Dow up to retest the support in that congestion zone from last Thursday and Friday. Nearby potential support on 60-minute closes is marked as are potential next upside targets, where resistance might be found on 60-minute closes.

Annotated 60-Minute Chart of the NDX:

As happened on the other indices, the NDX's 60-minute candle bodies were perching on a rising 9-ema by Friday afternoon of last week. This morning, prices exploded higher and ran all the way up to test the next resistance level, landing against it at the close today. The NDX needs consistent 60-minute closes above that resistance level to set the next target, marked on the chart.

If the NDX pulls back instead, the NDX's potential support on 60-minute closes waits below at the red 9-ema. If that fails to hold as support, other potential targets are marked, with potential support on 60-minute closes at those levels, too. Too deep a pullback will disappoint bulls and perhaps set up a retest of the lower congestion zone from last Thursday and Friday.

Annotated 60-Minute Chart of the Russell 2000:

The RUT's 60-minute candles were also finding support on a turning higher red 9-ema by Friday afternoon of last week. This morning, prices gapped above a couple of potential resistance levels and launched toward the next. On other indices, the next two potential targets are squeezed more closely together, converging in a way that make them look like potentially strong resistance. The picture isn't quite as clear with the RUT. It may be easier for the RUT to barrel through them one at a time, leading the way for other indices.

That remains to be seen. Whether after testing this resistance or higher resistance, it will soon be time for the RUT to pull back and retest the support of its rising red 9-ema. If that support doesn't hold on 60-minute closes, lower targets and potential support zones are also marked.

What's next then? Daily charts painted pictures that made it look slightly more likely that indices would rise up to test the next resistance band rather than fall immediately to retest last week's support. However, until the end-of-the-day push, most indices had set up pictures in which the two possibilities looked about equally weighted. Knowing that traders were positioning ahead of potential market-moving overnight developments makes one trust them a little less.

The intraday charts show that most indices had closed the day shoved up against potential resistance on the intraday charts. In the normal ebb and flow of prices, moving higher from this point would require a gap or sharp thrust up through that resistance seen on the intraday charts. Otherwise, what would be expected would be a pullback to test support, and it would be the result of that test that would give us a clearer picture. Consistent support on 60-minute closes on rising 60-minute 9-ema's shows a picture of strength. Barreling back below those 60-minute 9-ema's doesn't.

What we're left with is this: Market had declined sharply. It was time for a relief bounce. We don't know whether this is more than that, and we won't know until we see how high and long a relief bounce moves and how well support holds on pullbacks. For now, I would caution that the potential further deep downside targets have not been erased. That does not mean they will definitely be hit, but the possibility that a relief rally could fail and head toward those targets should certainly be kept in mind when trading. Beyond that, we wait for what tomorrow brings.