Market Internals

Introduction

With markets on Fed watch, we wait to determine if some alternative to Operation Twist will be revealed. Not all twisting is as happy as the dance of old by that name, however. Some twists bring unhappy surprises, such as one that occurred in Italy overnight. That one threatens to unravel hard-won accords reached at the end of November.

We might have many twists and turns in the fiscal cliff discussions, too, especially since Congress adjourns at the end of this week until January 15. I searched today for fiscal cliff headlines, but I didn't find many. Those were of the expected type at this point in the fiscal cliff discussions, with sample headlines of the "Both Parties Divided" type. That's what we expect at this point in the discussions when both sides must assert their positions, but the tenor needs to shift soon and a decision be made. The deadline nears. There is little need to rehash the particulars of those statements today as those particulars have been hashed to mush already and still have to be cooked into something palatable to all.

The SPX gained 0.03 percent; the Dow, 0.11 percent; and the NDX, 0.27 percent. The RUT rose a heftier 0.49 percent, and the SOX, an even heftier 0.62 percent. The Dow Jones Transports jumped 1.08 percent. Retailers were weak, with the RLX, the S&P 500 Retailing Index, dropping 9.81 or 1.47 percent. The BKX, a financial index, barely moved, dropped 0.03 or 0.6 percent. Gold and silver futures climbed but neither could maintain their highs of the day. Crude futures stayed just below Friday's lows most of the day and settled at 85.56/BBL, down 0.43 percent.

Monday's Developments

One of last night's most important developments was the release of China's trade balance. Experts anticipated a drop to 26.7B from the prior 32.0B, with that number denominated in dollars. The drop was much deeper than anticipated. China Customs reported the number at 19.6B. Also in Asia, Japan's Final GDP dropped slightly more than anticipated, to -0.9.

However, the good news was that China's industrial production and retail sales both rose more than expected, to an increase of 10.1 and 14.9 percent, respectively. Also, Japan reported good news. Its current account rose to 0.41T from the prior -14.T deficit.

In this mix of bad news and good news, China's Shanghai Composite rose 1.07 percent. The Nikkei 225 gained 0.07 percent; the Hang Seng, 0.39 percent, and the Straits Times, 0.23 percent. All those last three, however, fell most of the day from their opening highs.

Italian Prime Minister Mario Monti's announcement that he would resign by the end of the year was an unwelcome twist to the European story. That announcement pushed Italian bond yields higher and pressured equities across Europe. Because Prime Minister Monti is an economist and former European Union competition commissioner, he had restored confidence after the former prime minister, Silvio Berlusconi, quit due to legal problems. Under Monti's leadership, yields on Italian 10-year bonds had fallen and recently reached a two-year low.

Former Prime Minister Berlusconi's party withdrew its support from PM Monti, and he felt he could no longer lead. He is reportedly undecided about running in the new election, which could be held as soon as February. Supporters urge him to run again. First, he will attempt to garner enough support to pass the 2013 budget law.

The former prime minister has vowed to run again. He's known for his anti-austerity and, as a Bloomberg article termed it, German-skeptic posture. This development highlights the differences among European leaders and EU member states at a time when investors need confidence in a united front.

Greece added a twist of its own. It extended the deadline for domestic and foreign holders of Greek sovereign debt to tender their holdings for buybacks, extending the deadline to noon London time tomorrow. The original deadline was 5:00 pm London time last Friday. Greece is said to be near the target needed to meet the benchmark for receiving aid for the European Union and International Monetary Fund.

Those who have already offered their holdings are not being allowed to modify their agreements. Greece has increased the offer price above what was originally set as the maximum price, and most reporters and commentators believe the buyback will be successful. After the buyback is completed, the IMF will examine the results before deciding whether to approve the next tranche of aide, however.

When Greece announced the extension of the buyback, European stocks began bouncing off their post-Monti-announcement lows. Most managed minimally positive closes. The FTSE 100 gained 0.12 percent; the DAX, 0.17 percent: and the CAC 40, 0.18 percent. Spain's IBEX, however, dropped 0.56 percent. It rose off its lows at the same time the other indices did, but investors just couldn't bring it into positive territory.

Story stocks today included Ingersoll-Rand (IR, 47.79, down 0.90 or 1.85 percent). The company will separate into two companies, each standalones. Ingersoll Rand will be the new security company. A spinoff will comprise the residential and commercial security businesses. A quarterly dividend of $0.21 per ordinary share was announced, with that dividend being 31 percent higher than the previous such dividend. That's to be payable March 28, 2018 to shareholders of record on March 12, 2013. The company also announced a new share buyback program of up to $2 billion, to begin in 2013. Also announced was an increase in overall indebtedness and leverage ratio that the company felt would not compromise its investment-grade credit rating. This is part of a revised capital structure and allocation strategy.

Honeywell International (HON, 61.86, down 0.11 or 0.18 percent) will acquire Intermec (IN, 9.83, up 1.85 or 23.18 percent) for $10.00 a share in an all-cash transaction. IN stockholders and regulators still have to approve the deal, but if that approval occurs and other conditions and closing terms are met, the deal is expected to close by the end of Q2 of 2013.

Celldex Therapeutics Inc. (CLDX, 6.93, up 1.43 or 25.54 percent) jumped after reporting results in a Phase 2 study of patients with glycoprotein NMB, an advanced and heavily pretreated breast cancer. They were treated with CDX-011, an antibody-drug conjugate. The company reported progression free and overall survival benefits that were statistically significant.

Google (GOOG, 685.42, up 1.21 or 0.18 percent) saw disruption in several of its products on several continents today, Reuters and others reported. Those services included its Gmail service. Some users reported that Chrome also crashed.

Today Standard Chartered Plc (STAN.L, 1497.50, up 12.00 or 0.81 percent) said it would pay $327 million to U.S. authorities as a result of the case brought against the bank by the U.S. Justice Department and the New York District Attorney's office. The bank was accused of violating U.S. sanctions laws in dealings, particularly regarding Iranian sanctions.

After the close and just before this article was submitted, news broke that HSBC would pay at least $1.9 billion as a result of an alleged money-laundering pact.

Also after the close, The Treasury Department announced that it would sell the remaining 16-percent position is holds in AIG (33.36, down 0.77 or 2.26 percent). This amounts to 234.1 million shares, to be offered in a public offering. The stock price had dropped to 32.94 or down 0.42 or 1.26 percent in after-hours trading as this report was prepared.

TXN (29.82, down 0.03 or 0.10 percent) bounced above $30.30 immediately after the close, but then was knocked back toward the closing value. After the market close, the company narrowed its earnings and sales outlooks for the fourth quarter. The company now anticipates that profit will be $0.05-0.09/share, with the prior outlook at $0.23-0.31. It wasn't clear if those were apples-to-apples comparisons, however, as that included $0.21/share charges. Revenue projections were narrowed to $2.89-3.01 billion from the prior $2.83-3.07 billion. The midpoint, then, remained at $2.95 billion.

An industry-wide development was seen in the coal stocks. Goldman Sachs cut estimates for met coal prices.

A different kind of story was being told about the housing market. Today, Fannie Mae's Doug Duncan said that "attitudes about the current selling environment continue to improve." In a study conducted by Fannie Mae, those thinking it was a good time to sell a home rose 5 percent to 23 percent. This is the highest level that measure has been since the survey's inceptions in June 2010. Respondents who expect mortgage rates to rise also jumped, but so did those who expected home prices to go down the next year. Perhaps the best news was increased confidence in the ability to obtain a mortgage, with that number rising to 51 percent of those responding. That also is the highest level reached since the survey's inception.

In another international development of note, Venezuelan President Hugo Chavez flew to Cuba today for further cancer surgery. He announced this weekend that after tests in Cuba over the prior several weeks, more malignancy had been found. Yesterday, he vowed to return, but by today had admitted that the disease could result in a new election and the end of his 14-year rule.

Let's look at daily charts and determine what happened here in the U.S.

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:

The SPX has maintained daily closes above its moving-higher red 9-ema since November 19. It maintains its rally trend. To see even a minor change in tenor, bears need to see consistent daily closes below that red 9-ema. Traders have a benchmark to watch.

By Keltner methodology, the SPX has set up a potential retest of the 1427-1435 zone, where potential resistance on daily closes exists. However, the SPX obviously has butted up against the lower end of the former channel in which it once traveled. It came to a stop there again today as it did last week.

The SPX needs to break above that trendline and then bust through that next marked resistance level before I would consider the next target set at the nearest green zone. At the least, it needs to maintain daily closes above about 1429. Still, the potential for that target being reached remains as long as the SPX is in rally mode.

What if the SPX pulls back instead of breaking through the resistance it tested today? Potential support for the SPX converges in a thick band from that red 9-ema down to about 1395. This setup usually suggests that support will hold somewhere in that band on daily closes unless there's either a long, drawn-out battering at it or else a sharp plunge through it. What could deliver that kind of plunge? Repeated rhetoric about the fiscal cliff could be one precipitator of such a move. News that Greece had extended its deadline for its buyback not because it was nearing its target but because it was so far from the target could be another. Disappointment if our FOMC delivers no substitute for the expiring Twist program could perhaps do it, too.

If nearby resistance is pierced or prices plunge through that support, next targets are marked on the chart. Remember that the FOMC's decision on Wednesday could ultimately deliver a breakout, but that the initial breakout post-decision is not always the final direction. Hence the "ultimately." If you are the kind of risk taker who likes to play the FOMC decisions, decide whether you want to hold overnight after that decision is announced and the initial reaction occurs.

Annotated Daily Chart of the Dow:

The more easily pushed around Dow got pushed a bit higher today. This index already tests the Keltner zone that corresponds to the 1428-1430 zone on the SPX, but it has not risen to retest the former supporting trendline, as has the SPX.

Resistance for the Dow lies ahead in the form of that former support line that has since proven to be resistance. Also, in pulling ahead so fast, the Dow has pulled well above its 9-ema, leaving that moving average's support far behind. Barring an emotion-based run higher, it may soon be time for the Dow to either pause or else pull back to retest that support left so far behind. It's worth noting that the Dow's sister index, the Dow Jones Transports, today broke out above its November 29 high. Dow bulls want to see the transports maintain the breakout and not retreat strongly as that index sometimes does when approaching its current level. Dow bulls want corroboration from the transports.

If, either immediately or after another push higher, the Dow trends sideways to sideways up until the red 9-ema rises closer underneath it and only then dips down for a retest, it's showing strength. Further upside remains possible. If, instead, the Dow soon plunges down directly to that 9-ema, the outcome remains less certain. We could see an immediate rebound from the test, or some sideways consolidation before we know next direction. Potential downside targets are marked in case the Dow plunges through support and forms consistent daily closes beneath the 9-ema.

Annotated Daily Chart of the COMP:

My charting system is having difficulty with the NDX daily chart, so I've switched to the COMP to give us a look at the performance of a related index. I prefer the NDX since many of our subscribers might be trading NDX and MNX options, but the daily candles are not printing correctly on the NDX chart.

The COMP's prices have never convincingly cleared the red 9-ema. The chopping back and forth across the average has flattened that and other channel lines on the COMP's chart. This index does not always adhere as well as some other indices to the support and resistance levels marked, but we can clearly see that this is a trendless market right now. Neither closes above nor closes below that band of potential support or resistance has much meaning right now. On a Keltner basis, the COMP might as easily rise to the 12/3 high, the potential neckline of an inverse or reverse head-and-shoulders, as it could drop to a zone around 2935-2940. Consistent daily closes outside either of those zones sets the next potential target, and those next potential targets are marked on the chart.

If bulls gaze at this chart, they see that potential inverse head-and-shoulders and predict more upside. If bears gaze at it, they see a larger potential head-and-shoulders and predict more downside. Me? I predict that our fiscal cliff discussions, Europe's decision about whether to advance Greece the next tranche of monies, and the FOMC's decision about any alternative to the Twist program will roil the markets in ways we can't predict right now. This has been a headline-driven market for quite some time and continues to be so.

Annotated Daily Chart of the RUT:

The RUT has been chopping back and forth in a tight consolidation zone, too, but it's doing so above a still-rising red 9-ema. It still maintains an upside potential target of about 830, with the RUT tending to overrun such Keltner targets. Further upside targets are marked if the RUT should maintain daily closes above about 830.

However, bulls should be forewarned that bears might be willing to sell RUT stocks as the RUT approaches that 830 area. Such bears might be putting faith in a potential regular head-and-shoulders seemingly forming since July. We don't know yet whether such faith is warranted.

If the RUT should roll over instead of reaching for the next upside target and should then maintain daily closes below the red 9-ema, it's got potential support on daily closes layered down to about 808. It's difficult to ascertain where such a rollover might stop within that band. The RUT tends to move big once it starts moving.

However, just as bulls should be forewarned about that shoulder area on a regular head-and-shoulders, bears should be forewarned about a shoulder area on an inverse or reverse one. Bulls will be eyeing that 808 zone as potential support at a shoulder of a potential inverse or reverse head-and-shoulders. Bulls might might be willing to buy RUT component stocks on dips to that area. If not and if the RUT forms consistent daily closes below that level, further potential downside targets are marked on the chart.

What do I think? I think when we see competing regular head-and-shoulders and inverse head-and-shoulders, a lot of emotion-based trading is going on. I've seen this before, and I've made bets that I knew the breakout direction, but I was probably wrong as many times as I was right. What I know for certain is that bulls and bears are still battling it out, and I don't want to incur too many wounds while they do. Neither do I want our investors to do so. I have talked to expert active traders who are convinced that the breakout will be to the upside, and to others, just as knowledgeable, just as convinced that the breakout will be to the downside. The battle goes on.

I've suggested that readers watch the dollar futures for guidance, but ahead of the FOMC decision, those futures may be difficult to game. Let's look at another indicator: AAPL.

Annotated Daily Chart of AAPL:

It's a scary thing when a single stock can be as much a market mover as our currency moves might be. That single stock is AAPL, of course. When I last included an AAPL chart, I had warned that unless the stock price maintained the support it was testing that day, it risked a drop to the 530 level. The stock did not maintain that support that had been around 580, and it did drop.

As AAPL dropped heavily, the lowest channel line and its potential downside target also dropped, too. AAPL reached down to test it. The stock's rebound took it up to the channel line demarking the bearish half of the Keltner channels from the bullish half. That was a failed test, and AAPL's stock price dropped again. So far, the current low is higher than the previous 505.75 low. AAPL bulls who bought that previous low want it to stay higher, of course. However, until and unless AAPL can produce consistent daily closes back above the red 9-ema or at least the channel line now at about 533, it risks falling back toward 500.

I'm not an AAPL follower. I do employ equities in my speculative trades but not my income trades, so I'm not an expert on AAPL or on the behavior of AAPL investors and traders. I can imagine many AAPL investors willing to jump in again near 500 unless AAPL barrels right through that zone, but I would be careful about what I risked on such a trade. With that lower channel line sliding lower, AAPL's price could slide lower along it, like skiing down a slope.

If AAPL instead scrambles back above that red 9-ema again, watch for potential resistance near the end-of-November highs, where potential Keltner resistance also groups. Consistent daily closes above 598-600 are required to set the next potential Keltner upside target. However, I would certainly be aware of potential historical resistance a bit lower, at about 620, if I were in a bullish AAPL trade.

Tomorrow's Economic and Earnings Releases

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What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

On this intraday chart, we see lots of potential areas of support or resistance, but really anything within the purple channel constitutes chop or noise right now. Look for consistent 30-minute closes outside that channel to set the next target, marked on the chart with green (upper) and red (lower) rectangles.

Annotated 30-Minute Chart of the Dow:

The more easily pushed around Dow did break out of the purple channel, forming consistent 30-minute closes above it. However, it was never really able to break free of that channel line and candle bodies shrank in size. That action questioned its ability to reach the upside target that was set. Nevertheless, as long as the Dow forms consistent 30-minute closes above that channel line, it maintains that next upside target. If it drops through the channel, the strongest support is marked at the lower orange rectangle. Bears should know ahead of time how they'll treat a test of such support, in case it should produce a bounce. I would also watch for bounce potential at about 13100, if that is tested.

If that strongest support is broken by consistent 30-minute closes, the next potential downside target is marked.

Annotated 30-Minute Chart of the NDX:

If I can anthropomorphize a bit longer, the NDX has just decided to hang out in the middle of its purple channel, along the confluence of the central averages which form the channels: the 9-ema, the 45-ema and the 120-ema. It's not telegraphing any next direction!

Anything within the purple channel is noise, although breakouts above today's high might predict a move up to the top of the purple channel and breakdowns below Friday's low, down to the bottom of that channel. Bulls and bears alike should question how they would treat a test of the channel's outer boundaries, knowing that the channel boundaries could be markers for a move to the next targets or the rubbery membranes that bounce the price back inside the channels, like the outsides of a child's bouncy house. Next potential targets are marked in case there are consistent 30-minute closes outside the boundaries marked by the orange rectangles.

Annotated 30-Minute Chart of the Russell 2000:

It's the same story with the RUT with a little caveat. The RUT has already tightened so tight that a breakdown below the peach-colored 45-ema now near 822 may set the target for a drop to the lower purple channel boundary.

The RUT attempted a breakout above the purple channel this morning, pulled back and then tried again this afternoon. The RUT came within cents of testing the 826.58 high from a week ago. So far, the resistance has held, but the RUT certainly tried to lead the way to an upside breakout this afternoon and should perhaps be watched as an early indicator of what may happen next. What does the RUT's action predict about ultimate direction? Not a thing yet. The RUT is still within the choppy or noisy zone that it's created over the next week, so we know nothing, nada, zip. That's the way it often is leading into an FOMC decision. Potential next targets are marked in case the RUT breaks out of the congestion zone by producing consistent 30-minute closes outside that purple channel.

We used to see a common pattern setting up on FOMC weeks: volume dropped off, implied volatilities rose, and prices "triangled up" by about midday the day before an FOMC decision. The rising implied volatilities played havoc with some options trades and helped others, but the vols tended to even out either by the end of the FOMC day or by the next morning unless the post-FOMC move was a huge one to the downside. In other words, trading ahead of such a decision can be akin to an earnings trade, with all the excitement and dangers--and benefits to a lucky few--that such trades bring. Be particularly aware that implied volatilities may rise into that meeting even if prices stay in tight ranges, and then all the extra implied volatilities may rush out after the initial reaction. That can play havoc with determining your profit or loss in a trade.

Sometimes, when traders and investors have been fairly certain of the outcome of the FOMC meeting, they've front-run the reaction. That's been more common over the period of time when market watchers thought they could predict a new quantitative easing program. I'm not so sure that traders know what to expect from this meeting, however. Most Fed watchers believe the FOMC will do something to continue the purchases of mortgage-backed bonds, but exactly what is uncertain. Disappointment could be felt if no such program is announced. Moreover, there's likely some uncertainty and discomfort over what the Fed may have to say about the fiscal cliff. As Jim Brown mentioned this last week, too-strong a statement about the dangers of going over the cliff during the press conference after the decision could harm investor sentiment.

Fiscal cliff headlines could certainly break the indices out of their congestion zones, particularly headlines of the "we're all friends" or "we're disbanding discussions, never to meet again" type. We expect dissention early this week: we hope for resolution by the end of the week, the sooner the better.

We also live in a time when developments in Asia and Europe also prompt changes in market direction here, too, particularly Europe this week as Greece tries to meet all conditions for receiving its next tranche of aide. I would expect some continued choppiness with perhaps some sudden blips higher or lower due to the low volume.

When I look at the behaviors of the RUT, SOX and Transports, indices that tend to front-run moves, I see each of them running past some sort of resistance today. That leads me to believe some in the markets will be front-running moves to the upside. However, when I look at the RLX, an index that also often front-runs rallies, I see an index that was hit hard today. The BKX and BIX, financial indices, also offered little cheer. The Dow Jones U.S. Home Construction Index dropped. Some typical front-runners ran to the upside; some, to the downside. No clarity there, either.