Market Internals

Introduction

If you were waiting with bated breath for the U.S. lawmakers to come back from their holiday and all shake hands in harmony, Eurogroup officials to make a final decision about Greece, and markets to show their next direction, you might have turned an unlovely shade of blue today.

We doubted that fiscal cliff resolutions would be announced today. And we also knew, didn't we, that we weren't going to see that 12:30 EDT announcement time met by the Eurogroup, either. As this article is prepared for uploading, no decision has yet been made by the Eurogroup. Be watchful this evening or tomorrow morning for potentially market-moving news, however.

Technically, it was time for markets to pull back or trend sideways for a few days, absorbing recent gains. Political or geopolitical stalemates might be blamed, but the evidence was there on the charts anyway.

Today, the SPX sank 0.20 percent, and the Dow, 0.33 percent. The NDX, however, gained 0.46 percent, and the RUT squeaked out a gain of 0.22 percent due to a late-day push higher. The SOX gained a much bigger 2.24 percent and the transports also gained, 0.65 percent. Commodities such as gold, silver and crude produced small-bodied candles indicative of indecision, in keeping with what we will see on the dollar futures chart. With a few exceptions, markets paused where we expected them to pause.

Monday's Developments

Asian bourses turned in mixed performances last night. The Shanghai Composite dropped 0.49 percent. Japan's Nikkei posted yet another day of gains, producing a 0.24 percent gain, although it closed near the low of the day. After an early morning high, perhaps boosted by the weakness of the yen when compared to some other currencies, the Nikkei 225 then trended down most of the day. The Hang Seng lost 0.24 percent, but the Straits Times gained 0.51 percent.

With Eurogroup decisions not resolved while European bourses traded, those bourses were underwater all day. The FTSE 100 closed down 0.56 percent; the DAX, 0.23 percent, and the CAC 40, 0.79 percent. Spain's IBEX 35 closed down 0.44 percent, near the middle of the day's range.

We know that European bourses were impacted by the uncertainty related to the ongoing Eurogroup meeting. However, that meeting was preceded by a snap election in Spain this weekend with a Catalan separatist party winning.

The party's president Artur Mas' has promised a wonderful future for Catalan if it separates from Spain. Exit polls suggest that 50 percent of Catalans favor separating. Some expert observers believe that a strengthening separatist movement could further destabilize the eurozone's financial system, forcing Spain to make a formal request for help.

A primary hurdle in today's Eurogroup meeting lay in producing an estimated additional $13 billion (10 billion euros) for Greece. This is additional money Greece will need due to a proposed two-year extension of the time Greece has to meet deficit-reduction targets, an extension that the IMF reportedly didn't like going into this meeting. The IMF also quarrels with the current benchmark of 120 percent for Greece's debt load.

Each proposal for producing those extra funds for Greece meets objections from the countries that will be hurt by those particular efforts. I could summarize each proposal and list the countries objecting, but a better summarization for our purposes comes from Jose Barroso, head of the European Commission, quoted in a Bloomberg article. Barroso said, "Anything short of admitting that our talks have been extraordinarily complex and difficult would not reflect reality" ("Euro Ministers Take Third Swing at Clearing Greek Payment").

By early afternoon, the IMF had released a debt and repayment timeline for Greece that allegedly gave Greece until 2022 for repayment. It appeared that some movement was made if the IMF was more amenable to that extended time table, but that's about the only news dribbling out of the meetings by the time this article was uploaded, and that may be undone by the time it appears in your mailboxes.

In another across-the-pond development, the Bank of England announced a new governor to replace incumbent governor Mervyn King when he retires next July. This announcement was not expected until next week. Many anticipated that Deputy Governor Paul Tucker would be chosen, although some called for a new governor who might pursue a more radical approach than Governor King has done. Instead of naming Tucker, however, UK Chancellor George Osborne named Canada's central bank governor, Mark Carney. Carney currently serves as head of the Group of 20's Financial Stability Board. This appointment was an even bigger surprise since Carney had suggested at one time that he wouldn't be a candidate for the position.

The Bank of England wasn't the only important governmental entity announcing a replacement for its former leader. Here in the U.S., the SEC's Chairman Mary Schapiro announced that she would step down on December 14. Schapiro had been chairman since January 20, 2009. Shortly afterwards, President Barack Obama announced that Elisse Walter, a current SEC commissioner, would step in as chairman.

Because Walter is a current panel member, she can serve through the end of 2013 before Senate confirmation is required, giving President Obama time to nominate her or someone else for a full term. Walter has stepped in previously as an acting chair, in January, 2009.

Schapiro has expressed disappointment in the past that she was unable to garner enough support to put more stringent rules for the money-market fund industry into effect. Some subscribers may remember that during the crisis of 2008, one fund "broke the buck." Schapiro felt that the industry should put into place measures to bail itself out rather than expect taxpayer support. She also has been seeking to implement measures to prevent another flash crash, with some technology issues still thwarting those efforts. Her successor will likely be pressured to place restrictions on high-speed traders.

Our economic releases may have mostly been overlooked today due to the big developments here and across the pond, but we saw two releases. In the first, analysts predicted a range of 0.10 to 0.25 for the Chicago Fed National Activity Index (CFNAI), up from the prior 0.00. The index is constructed so that zero is the benchmark, with a positive number indicating growth above trend and a negative reading, growth below trend.

Instead of meeting expectations, October was described as a "sub-par" month, with the index dropping to -0.56 and the three-month average also dropping to -0.56. Sandy's impact showed up in the production component that dropped from -0.06 to -0.45. A decline in housing permits pushed the consumption and housing component slightly lower. Employment and sales/orders/inventories indices climbed, however.

The Dallas Fed General Business Activity Index, released midmorning, also has a benchmark of zero, with a positive number indicating growth and a negative number, decline. November's production index measured 1.7, indicating increased output, but it "barely increased" in the words of the report. New orders measured 0.4, with the report calling that number a sign "that demand was unchanged from October." The general business activity index fell to -2.8 from a prior +1.8, well below the expected 2.5-5.0 consensus range.

The employment index moved up to 6.7. The report says more than 20 percent of the firms reported hiring while 15 percent reported layoffs. The hours worked component dropped, however. Indices relating to future business conditions dropped sharply.

Those of us waiting for more headlines about the fiscal cliff found fewer headlines than we might have expected. That development might have been met with a sigh of relief rather than blue lips. We know negotiations will be tough. We expect lawmakers on both sides of the aisles to declare their unwavering stances. We expect some resolution to eventually occur.

Several lawmakers have signaled their willingness to compromise, drawing the ire of others in their own parties. Some articles focused on the issues that separated the parties rather than the moves toward compromise. By now, we know what those differences are. They were not resolved today, so I won't go into further depth here.

Other negotiations were going on in another part of the world. Egyptian President Mohamed Mursi met with senior judges today. Jim Brown covered the situation in his Wrap this weekend. Protestors want the president to retract the decree that Jim Brown detailed. Others believe that it might be acceptable if the president will agree to the proposal by Egypt's highest judicial authority to limit the powers grabbed last week through the President Mursi's decree. One proposal is to limit the decree's powers only to "sovereign matters."

Anyone waiting with bated breath to see how retailers performed the first weekend of holiday shopping might have found themselves short of oxygen, too, as there was little cohesion to how retailers behaved today. By mid-afternoon, initial reports showed Cyber Monday sales tracking as much as 24.1 percent over last year's sales at the same time, with information supposedly drawn from IBM's Digital Analytics Benchmark (Rao, Leena. TechCrunch.). The news might be especially good for Apple, since the iPhone appeared to be driving more mobile device sales than other devices.

Some retailers such as Abercrombie (ANF, 44.61, up 0.21 or 0.47 percent) gained in early trading while others lost ground. Even ANF pulled back sharply from its early morning high and then bumped along the breakeven level most of the afternoon.

Story stocks today included McGraw-Hill Companies (MHP, 51.89, up 0.20 or 0.40 percent), with that company agreeing to sell its educational publishing unit to Apollo Global Management LLC (APO, 15.27, down 0.06 or 0.39 percent). After taxes and other "certain adjustments," McGraw-Hill expects to realize $1.9 billion. It will use the money for acquisitions and share buybacks.

Other than this deal and news about retailers, story stocks mostly included stories of stocks responding to upgrades or downgrades. Those knee-jerk reactions can be undone by the next day, however, and this report is long already, so I have not covered them here. However, we can never afford to leave off Apple (AAPL, 589.53, up 18.03 or 3.15 percent), with its shares responding to a positive note from Citigroup.

Facebook (FB, 25.94, up 1.94, 8.09 percent) saw strong gains on huge volume, at more than triple the three-month average. This is one of those stocks reacting to a positive statement from an analyst.

Let's look at the daily charts, with the viewpoint that after last week's rabid gains, it was time for indices to pause.

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:

After prices surged higher on many indices last week, pushing well above rising red 9-ema's, it was time for one of two actions to begin: a pullback to the 9-ema's, or a sideways trading pattern of 3-5 days until the 9-ema rises closer underneath small-bodied candles. Many indices had retraced between 50-61.8 percent of their declines off the last October peak highs, too, and completed those retracements in a few short days. It was time for a pause for reassessment.

The purpose of such a pause is to let buyers and sellers rebalance. We don't know the outcome of this test. That's the purpose of the test, to determine which is stronger, buying or selling pressure.

The SPX's candle today was a small-bodied one with a long lower candle wick or shadow. That's indicative of indecision and is also sometimes seen at the top of a climb.

The SPX was one of the few indices that surged past the (green) 120-ema on a daily close last week. Most other indices paused at or just underneath that important moving average, the benchmark for undoing that much lower downside target that had been set. Therefore, it will be important to determine whether that moving average and the 9-ema rising just beneath it continue to provide support on daily closes. That's what bulls want to see happen.

The Keltner setup suggests that if the SPX does maintain closes above both the red 9-ema and green 120-ema, it sets a tentative upside target just above 1450. However, I have left the channel lines marking the channel in which SPX was descending before it broke lower. The chart would be too cluttered if I placed yet another rectangle on the chart, but traders should be aware that what was once support at the bottom of the former descending price channel could now be resistance. The channel's boundaries are included.

With the candle that was produced today, bears will be hopeful of follow-through to the downside tomorrow. If the SPX breaks lower, closing consistently again below the 9-ema, watch for potential support now converging near 1360, down to the 11/16 low. Breaks below that November low that aren't reversed within a few hours or at least by the daily close reset that much lower target marked by a red rectangle.

Annotated Daily Chart of the Dow:

The Dow also produced a small-bodied candle with a long lower wick or shadow. Unlike the SPX, the Dow never did push through the green 120-ema and the other forms of resistance converging nearby, much less produce consistent daily closes above it. The Dow instead has so far stalled just below it. The Dow did, however, push higher long enough to turn the red 9-ema higher, and it has produced several daily closes above that moving average.

Therefore, although the Dow hasn't quite completed what it needs to do in order to erase that potential downside target and today's candle is not one that bulls love to see at the top of a climb, the Dow's climb has certainly accomplished enough to question that lower target at the red rectangle.

However, Dow bulls have some hard work ahead now. First, they don't want to see a reversal tomorrow that reverse more than 50 percent of Friday's gain. Bulls want to see closes maintained above a turning higher red 9-ema. If that support should fail on daily closes, they want to see the support hold at the lower orange rectangle down to the November low.

Better than any of those choices, bulls want to see the Dow push above 13100 and maintain closes above that level. As with the SPX, I've marked the next upside Keltner target if that should happen, but bulls need to be aware of potential resistance where support once existed, at the lower boundary of its former descending channel.

Consistent closes beneath about 12650 and especially beneath the November low make that lowest rectangle a much more likely target.

Annotated Daily Chart of the NDX:

The NDX gapped its way higher since 11/16 but not high enough to closely challenge the resistance converging near 2650-2670. Like the other indices, the climb was strong enough to turn the red 9-ema higher again and to produce several daily closes above that moving average. Those who want to see continued gains want to see any pullbacks find support on daily closes above that moving average.

What's next for the NDX: a pullback to the 9-ema, a gap or quick run up to test that resistance zone just overhead, or a sideways trending until the 9-ema catches up?

Yes, one of those.

Unfortunately, this setup doesn't give a strong preference for any of the three, although it perhaps gives a slight preference to a continued push a bit higher. The NDX's daily candle today was a strong one, not a small-bodied candle indicative of indecision or commonly part of a reversal pattern. If the NDX had already produced three gaps on its climb up, I'd tend to think a pullback to the 9-ema was the next most likely action, but the NDX may have another gap still to go before it starts running out of steam. We've just gotten the breakaway gap and one running gap and that's not quite enough to be strongly suspicious of waning strength just yet.

However, even the mighty NDX does not exist alone and can't run up for long without help or participation from overall market strength. When coupled with much murkier action on some of the other indices, I'm not certain how much credence to give the thought of a continued push higher, especially given the geopolitical developments that can hit at any time.

Fortunately, we have some benchmarks to watch. Bulls would prefer to see the NDX find support on pullbacks at the 9-ema. They don't want to see daily closes beneath about 2550 and really don't want to see any values below the November low that aren't quickly reversed. Bears don't want to see sustained daily closes above the green 120-ema. Next potential targets are marked on the charts, in case either of those events happens.

Annotated Daily Chart of the RUT:

The RUT climbed up to test the green 120-ema and other resistance converging there and then paused. It now appears to be time for the RUT to either pull back to test the rising 9-ema's support or else trend sideways long enough for the 9-ema to rise up closer underneath current values. But then when we consider this chart in relationship to the NDX, we know that it's unlikely that the RUT will either pause or pull back if the NDX is posting another strong gain. The picture is cloudy because the RUT obviously is jammed against the overhead resistance pictured here.

You know the drill now. Bulls want to see the RUT maintain daily closes above a rising 9-ema or, even better, to jump above the resistance converging near 810-812 and maintain daily closes above it. Bears want to see the RUT continue to struggle with the 810-812 level and fall back beneath the 9-ema and maintain daily closes beneath it.

Daily closes between the red 9-ema and 810-812 is noise, chop that does not yet determine next direction. If the RUT maintains closes above 810-812, the next potential Keltner target is marked. I've also included the former descending channel's resistance line, and bulls would do well to prepare for a resistance test if that is approached. If the RUT falls through the 9-ema and the next potential target near 780-783, then the November low might also be a bounce point. Bears should prepare for a support test there although it's not marked on the chart with a rectangle.

Annotated Daily Chart of the Dollar:

On 11/16, dollar futures hit the 50 percent retracement of the decline from the 84.245 July high to the 78.725 September low and pulled back. While the dollar was pulling back, prices on equity indices and commodities such as gold and silver were jumping higher. Today, dollar futures paused their decline, producing a small-bodied candle. A bounce tomorrow would likely pressure equity indices.

As has been noted, the performance of the dollar is not isolated and depends not only on what happens here but also on what happens in Asia and Europe. Keep this chart of the dollar futures on your radar screen, or, if you prefer, watch one of the paired groupings, such as the USD/JPY or EUR/USD. Although the relationships can shift, a strengthening of the dollar in relationship to other currencies, a bouncing from support, could pressure equity and commodity prices prices.

Tomorrow's Economic and Earnings Releases

Both Dallas Federal Reserve Bank President Richard Fisher and Atlanta Federal Reserve Bank President Dennis Lockhart will be speaking at the Levy Institute Hyman Minsky Conference on Financial Instability in Berlin. Audience questions are anticipated.

FOMC Chairman Ben Bernanke will be in Washington. He will deliver welcoming remarks at the National College Fed Challenge Finals. No question and answer session is mentioned in the description.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

The function of the rising red 9-ema in a rally becomes visible on this SPX 60-minute chart. It's the backbone that supports the rally, the springboard from which it bounces, or the perch upon which it rests on 60-minute closes. By mid-morning, the SPX was doing more perching that it was springing with the 60-minute 9-ema flattening rather than climbing, although a late-day rise curved the 9-ema slightly higher again.

In order to set a new upside target, the SPX needs to sustain 60-minute closes above today's high, turning the red 9-ema higher again and bouncing from it on 60-minute closes. The next potential upside target is marked if the SPX can manage those requirements.

If not, and if the SPX drops instead, potential support exists in rather regular, staggered intervals. Support appears to be converging nicely near and slightly above 1390, so a strong plunge or repeated battering might be necessary to break through that potential support on 60-minute closes. Make no mistake: current geopolitical developments can provide the catalyst to break through that support, just as they can serve as the catalyst to spring higher. If the 1390-ish support is broken on 60-minute closes, other levels of potential support are marked.

Movement between about 1390 and 1410 looks like chop.

Annotated 60-Minute Chart of the Dow:

Although the Dow looks decidedly weaker than the SPX on the daily chart, its setup on this 60-minute chart looks similar to the SPX's. The Dow was maintaining 60-minute closes on a moving-higher red 9-ema, but today's action flattened that 9-ema until the EOD push curved it slightly higher again. To move higher again, the Dow needs to break through the resistance grouped just overhead and sustain 60-minute closes above today's high. Such action should be enough to turn the 9-ema higher again, and then it can be watched to see if it continues to provide support on 60-minute closes. The next potential upside target is marked in case those conditions are met.

Like the SPX, if the Dow turns lower instead, it has staggered potential support levels at regular intervals. The support near 12830, however, doesn't look as strong as the SPX's support near 1390 did, and any sustained break below today's low could easily break through that support, too. Lower potential support levels are marked on the chart, if that should happen.

Annotated 60-Minute Chart of the NDX:

If the Dow looked weaker than the SPX when compared via the 60-minute Keltner setup, the NDX looks stronger. The red 9-ema did not flatten in the same way but moved up all day. The NDX did not pull back off its morning high to the same degree as those other two and soon reached a higher high in the afternoon. As long as the NDX maintains 60-minute closes above the red 9-ema, it maintains a newly set next potential target just above 2700.

If the NDX falls back tomorrow, lower levels of potential support on 60-minute closes, zones the NDX might target in a decline, are marked on the chart.

Annotated 60-Minute Chart of the Russell 2000:

Until late today, when short-covering or perhaps actual buying brought the RUT to a new high, the RUT's chart outlook lay somewhere between the others. It, like the NDX, scrambled high enough to set a new upside target near 821. However, unlike the NDX, it did not set an afternoon high that was higher than the morning high until that last candle, so that the 9-ema flattened.

I tend to distrust late-day moves, especially when they might be prompted by short covering when shorts realized that we weren't going to get a Eurogroup decision before the end of day. However, we must acknowledge that the EOD action tentatively set a potential upside target marked on the chart. I do not trust this action, but that doesn't mean that I didn't adjust my own trade appropriately, either, believing that "it's got to pull back." It doesn't have to do anything.

Bears need to see the RUT pushed back below that 9-ema on 60-minute closes. The next potential target and support zone on 60-minute closes is near 797-800. Like the other indices, the RUT has staggered potential targets at regular intervals, areas where the RUT might find support on 60-minute closes unless prices barrel lower.

I wish we had known something about the Eurogroup's thinking before this Wrap was submitted. I scanned all sorts of news sources a last time just before this article was uploaded, hoping that news would be released, but we've been waiting for months for that definitive answer.

Please be aware that everything shown on these charts can be undone by the global markets' reactions to news or lack of news from the European finance ministers as well as other developments. Volatility indices were a bit higher today, but that was perhaps in reaction to the uncertainty.

What we're left with is this: the dollar paused, perhaps in preparation for a bounce or just before a renewal of recent weakness. The SPX and Dow paused, too, both producing the types of candles that are sometimes seen ahead of market reversals. Courtesy of Apple, the NDX's candle was a bullish one. The RUT's was neither particularly bullish nor bearish, but the RUT paused near expected resistance.

Markets are waiting, just as all of us are.