Market Internals

Introduction

As if playing out against an already written movie script, a rainbow of hope appeared just when expected, brightening the stormy skies above that hypothetical fiscal cliff. The first shimmering rainbow colors appeared this weekend. House Majority Leader John Boehner said he was willing to cap the extension of tax cuts to those making less than $1 million. He was also reportedly willing to increase the figure for total revenue produced by this change to $1 trillion. Those proposals were conditioned upon changes in Social Security, Medicare and Medicaid, so the deal was still far from done. Later in the day further talks brightened a fading rainbow again.

The rainbow brightened the moods of investors and other market participants. The SPX gained 1.19 percent; the Dow, 0.76 percent; and the NDX, 1.38 percent. The RUT rose 1.37 percent; and the SOX, a smaller 0.42 percent. The Dow Jones Transports rose 0.77 percent, corroborating gains in the industrials and other indices such as the SPX. Homebuilders were strong with the Dow Jones Home Construction Index posting a 4.46 percent-gain. The S&P Banks Index, the BIX, gained 3.13 percent, and the BKX, the KBW Bank Index, gained 2.76 percent.

The NYMEX reported that gold chopped around but then managed to "claw back" into positive territory. Silver was in the bear camp, however, with March silver dropping to the lowest levels seen since early November. February crude futures hit a new three-day high. If the commodities produced a mixed outlook, the dollar's behavior provided little outlook at all. Dollar futures dipped in early afternoon to another new recent low but then climbed enough to produce a small-bodied candle near the flat-line after all was said and done.

Monday's Developments

Our futures had held up well overnight despite mixed performances in Asian bourses. Most Asian bourses had declined with a couple of them bucking that trend. For example, the Nikkei 225 had gained 0.94 percent. This occurred after weekend elections that saw Abe Shinzo's Liberal Democratic Party take two-thirds the seats for the lower house of Parliament. Voters hoped that the results of those elections would result in an improvement in deflation. Stocks likely also gained because the yen weakened against other currencies such as the U.S. dollar and the euro.

The Hang Seng dropped 0.41 percent, and the Straits Times lost 0.31 percent. China's Shanghai Composite rose 0.45 percent, joining Japan in bucking the general trend. In China, the foreign-exchange regulator raised the investment limit for central banks and sovereign-wealth funds to take positions in local bonds and stocks. The government also concluded a conference on economic policy and issued a statement that appeared to be agreement with past policy statements.

Some articles describe governmental think tanks as disagreeing with the official stance, however, with one of those think tanks warning last week of looming structural imbalances. Perhaps investors were reassured by the government's statement after a more worrisome assessment from the think tank.

If Asian bourses were mixed, European ones were less so as daylight broke over the United States. They were pressured lower, at least in part by a report by Germany's Bundesbank forecasting bad weather for Germany's economy. The central bank forecast a temporary economic slowdown. That report began, "The cyclical outlook for the German economy has dimmed."

The central bank had issued a gloomy report earlier in the month suggesting that the country would experience a short recession over the winter. Since then, Germany had seen more upbeat economic results. It was hoped that the economy could weather the eurozone's woes with some equanimity. However, the current report reiterated the expectations for a "noticeable drop in economic production at the end of the year," with the outlook for Germany companies deteriorating.

Although the central bank's report painted a gloomy scene, it wasn't all dark skies. While the central bank did not believe that Germany's economy would grow in 2013's first quarter, it did believe that, barring further shocks to the system, the economy could be bottoming out. The introductory summary to the projection ended with this rainbow of hope: "Nonetheless, the sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the employment, in particular."

U.S. futures traders had held onto their slight positive bias into the pre-market session, despite the gloomy projections in Europe. They saw rainbows heralding the end of the storms rather than the gloomy clouds that remained. Monday usually proves light on U.S. economic releases, but today produced two. The first added to the clouds. At 8:30 am ET, the New York Fed released the Empire State Manufacturing Index. Analysts had predicted that the index would rise from the -5.2 level to -0.7, but instead it dropped to -8.1.

Manufacturers responded to the New York Fed's survey with estimations that Sandy drove October and November revenues 7 and 5 percent lower, respectively, than they would have been. However, was Sandy alone to blame? This survey marks the fifth consecutive month of declines, beginning well before Sandy hit. The decline appears part of a pattern, then, and not just an aberration due to Sandy. Underneath the headline general conditions index, most indicators were gloomy, too. New orders, shipments, employment and prices received all fell. Prices paid rose moderately. The only rainbow was found in the indices for six-month outlooks, with those indices increasing.

TIC Long-Term Purchases followed shortly, at 9:00 AM ET. This number subtracts the number of long-term securities purchased by U.S. citizens from those purchased by foreign entities. This number was expected to rise from the prior 3.3B to 24.3B, with this number denominated in U.S. dollars. Some concern had been expressed after the prior low 3.3B, with some market experts fearing that foreigners were showing less interest in U.S. securities. Today's results weren't going to lessen that concern. The number dropped to 1.3B.

Some market pundits attributed the lower-than-anticipated number to more optimism about Europe's ability to resolve its debt crisis rather than concern about the U.S. Also, although concern should be acknowledged, a Forex Factory two-year graph of the results indicates that this number has been quite volatile, peppered with quite a few instances of numbers near the flatline. Note that sizing requirements for publication rendered the legends a bit fuzzy.

TIC Long Term Purchases:

Our market performances also depend on developments across the globe to a greater degree than they once did, and ECB President Mario Draghi's speech at 9:30 am drew attention, particularly in the forex markets. Forex movements can impact stock market performances. The EUR/USD pair shot higher as the ECB president began to speak. He again touted the benefits of a single bank regulator apparatus to improve confidence in the banking sector, among other topics. President Draghi testified about the economy in Brussels before the quarterly hearing of the Committee on Economic and Monetary Affairs.

Before his speech, European markets had been hunkering lower beneath those cloudy skies. When the EUR/USD bounced, U.S. stock markets reacted, too, if perhaps they didn't respond quite as enthusiastically as euro buyers in the forex markets. At the end of the trading day in Europe, the FTSE 100 had lost 0.16 percent; the DAX had climbed 0.11 percent; and the CAC 40 had dropped 0.14 percent. Spain's IBEX gained 0.20 percent. ECB President Draghi had perhaps again rescued European markets from gloomy skies as all had moved well off their day's lows.

Two FOMC members closed out the day's scheduled economic events in the U.S. Federal Reserve voting member Jeremy Stein spoke in Frankfurt at the European Central Bank. He titled his speech "Dollar Funding and Global Banks." Stein pointed out the rapid rise in the dollar liabilities of foreign banks over the last two decades. He and coauthors Victoria Ivanshina and David Scharfstein have been studying the implications of the increasing use of wholesale dollar funding by the globe's financial entities, particularly because this results in uninsured dollar liabilities at some eurozone institutions. His model predicts that shocks to the system result in a change in the way a hypothetical eurozone bank maintains its dollar-based lending, which in turn has ripple effects. The discussion proves interesting but is beyond the scope of this article and perhaps beyond the scope of my understanding of the topic, too. The discussion can be found at this site.

Stein's talk concluded with the belief that the temporary dollar liquidity swaps among the Federal Reserve, the ECB and other central banks constitute "an effective response to stresses in dollar funding markets." He also concluded with a discussion of the outdated regulation of U.S. branches of foreign banks. After the Draghi-induced bounce in the EUR/USD, the forex pair had retraced part of the gains. Forex markets initially responded to Stein's discussion with another a bounce in the EUR/USD, but that bounce flattened out below the level of the Draghi-induced bounce.

At 1:00 pm ET, Federal Reserve Bank of Richmond President Jeffrey Lacker, also a voting member, spoke in Charlotte at the Chamber of Commerce Annual Economic Conference. He provided an economic outlook to those attending the conference and reading his prepared materials, available at this link. He noted factors that could hold back a more robust recovery and suggested that the 2013 GDP might grow at an annual rate of two percent. He assured listeners that bank reserves were enough to support economic recovery. He doesn't believe additional asset purchases will have much, if any, effect on growth. He warned that the Fed's efforts at monetary stimulus had less effect on real output and employment than many of us think and that the Fed could damage its record of achieving price stability by attempting to use accommodative monetary policy to improve labor market conditions.

Next, a new focus drew attention to the fiscal cliff discussions again, with news that President Barack Obama and House Majority Leader John Boehner were meeting at the White House. Stock gains had been losing steam, but their 45-minute meeting propped up gains. Various commentators speculated that progress was being made, but those speculations were couched with caveats that a deal could not yet be considered imminent. The House Majority leader is due to meet with House Republicans tomorrow.

Story stocks start with AAPL (518.83, up 9.04 or 1.77 percent) today. This weekend, Jim Brown clarified misleadingly dour headlines about the iPhone 5's debut in China. This morning, AAPL said it sold more than 2 million of these phones in China in their first three days of availability. The news wasn't all good, however. An analyst with Citigroup cut AAPL's rating from "Buy" to "Neutral." The analyst, Glen Yeung, cited questionable strength of iPhone 5 demand. I don't always include downgrades and upgrades because they often come far later than is helpful to individual traders, but this one was getting much news coverage. Yeung did not believe AAPL would rally any time soon. In the charts section, we'll look at an AAPL chart, but it should be noted here that AAPL gained a further $1.47 in after-hours trading, last at $520.30 as this report was prepared.

This weekend, Jim Brown had mentioned that AAPL suppliers were also getting hit on Friday, suffering along with AAPL. However, perhaps some of the would-be sellers read Jim Brown's commentary on the fallacy of dumping those stocks along with AAPL since they also supply AAPL's competitors in many cases or else already agreed with that sentiment. Some of those suppliers such as Qualcomm (QCOM, 62.04, up 2.21 or 3.69 percent) and Skyworks Solutions (SWKS, 20.75, up 0.96 or 4.82 percent) bounced today.

Also in the tech space, Compuware (CPWR, 10.76, up 1.23 or 12.91 percent) benefitted after Elliott Management Corporation agreed to acquire the company. Elliott agreed to buy it for $11.00/share, a premium to Friday's close. This morning, CPWR had reached as high as $11.16 before dropping back below the offer price, perhaps driven higher by surprised shorts who needed to cover.

Biotech company Enzon Pharmaceuticals, Inc. (ENZN, 4.70, up 0.13 or 2.95 percent) researches and develops therapeutic treatments for cancer patients whose medical needs are not being otherwise met. The company announced today that it has retained a financial advisor, Lazard Ltd., to discuss the sale of the company or of one or more corporate assets. The company plans to suspend development of the androgen receptor program in order to conserve cash. Carl Icahn has allegedly expressed interest.

Another pharmaceutical, Lexicon Pharma (LXRX, 1.99, up 0.12 or 6.15 percent) said that its LX1033, a drug that treats diarrhea-predominant irritable bowel syndrome, has received "Fast Track" status from the FDA. This is an orally-delivered drug.

Since transports were so strong today, it may be important to note that Ryder Systems, Inc. (R, 48.82, down 0.78 or 1.58 percent) was a transport that bucked the trend and headed lower. The company announced the retirement of Chief Executive Officer Gregory Swienton in May, 2013 at the annual shareholders meeting.

Another transportation-related company's stock lost ground, too. Con-Way (CNW, 27.47, down 0.60 or 2.14 percent) dropped after a downgrade that cited consensus estimates that were too high.

JPMorgan Securities (JPM, 43.48, up 0.67 or 1.57 percent) and Bear Stearns and Co. were sued by the National Credit Union Administration, the U.S. credit union regulator, today. The suit involved $3.6 billion in mortgage-backed securities credit unions bought from Bear Stearns, since acquired by JPM. Losses from the securities collapsed some of those credit unions.

This is not the first such suit brought by a government entity. Jamie Dimon has, in the past, chastised the government for taking such actions after JPM bought the endangered investment bank in 2008 in the midst of a chaotic financial environment. JPM essentially performed a service to the Federal Reserve in buying the bank, in Dimon's estimation. The most current lawsuit alleges that Bear Stearns made misrepresentations when selling those securities to credit unions. Investors weren't much bothered. JPM added another $0.22 in after-hours tading.

Yelp (YELP, 18.93, down 0.53 or 2.72 percent) dropped, with commentators blaming Facebook's (FB, 26.75, down 0.06 or 0.23 percent) upgrading of its Nearby feature.

Google (GOOG, 720.78, up 18.82 or 2.68 percent) bounced along with other stocks, but some rumors also helped it along. Some think that the U.S. Federal Trade Commission might be close to ending its investigation of the company and that GOOG without onerous conditions for GOOG. GOOG was up another $0.67 in after-hours trading.

Let's look at a few daily charts.

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:

Daily closes inside the boundaries of the two orange rectangles constitute closes within a congestion zone. Such closes don't do much to predict final direction, and it's also difficult to predict where support or resistance will be found inside that price band.

The SPX came close to breaking through 1128-ish resistance today, as it did with the 12/11 and 12/12 closes. However, the advance stopped at resistance. Now traders would need to see consistent daily closes above about 1435-1437 at least before considering a breakout confirmed.

What's the rainbow-tinted take on the chart? Ignoring Friday's one-day close beneath the red 9-ema, the SPX has continued to follow its rally pattern of finding support on daily closes at the 9-ema. When following that pattern, it tends to bounce sharply after testing the 9-ema, then consolidate sideways to sideways up for a few days until there's a repeat of the pattern.

Bears should beware as long as the SPX continues with this pattern, and bulls should be wary of a change in that pattern. Consistent daily closes outside the orange rectangles set the next targets, marked by green and red rectangles. While prices remain between those two rectangles, we know little.

For now I view this chart as showing that markets will have a knee-jerk upside bias if any strong hints or confirmations of fiscal cliff deals occur. However, it's uncertain that such knee-jerk reactions will be sustained without confirmation. Any run up that results will soon butt up against potentially strong resistance.

What happens if even those hints of resolution dissipate, like a rainbow fading away? We all believe that something will be done, and most of us have come to believe that even a failure to reach a consensus before Congress disbands for the holidays would just constitute a ramping up of political posturing. Still, a pullback might be expected in that case.

The chart shows those layered levels of potential support. A strong cascade lower will pierce them, so you'll know to stand back if the SPX and other indices plunge through those layers of potential support now gathered beneath them rather than reach down and then rebound.

Annotated Daily Chart of the Dow:

Consistent daily closes beneath the 9-ema would set up a potential downside target near 1993-13060, but the Dow has so far maintained daily closes at or above the red 9-ema. Like the SPX, closes between the two orange rectangles now constitute chop, but chop with a bullish bias. Closes within those orange rectangles won't tell us much about ultimate direction, but the behavior with respect to the 9-ema does tell us that the knee-jerk sentiment might be to bolt higher on hints of resolution of the fiscal cliff difficulties. Such bolts higher might or might not be sustained. It should be noted that today's advance stopped at expected resistance. It's shown here by a former supporting trendline, but that's echoed by previous highs, lows and closes.

What if those fiscal cliff discussions stop without resolution? Layers of potential support now stretch below the current Dow position. It's difficult to tell which level of historical support or resistance or which moving average or Keltner or Bollinger band level will stop an advance or decline.

Those levels of potential support look thickly layered enough that they appear to be strong, but what could weaken them? An We have too many potential triggers to count. How convinced are investors, funds and others that a lack of resolution by the end of the year just constitutes more political posturing? If we're convinced that's what's happening, support should hold even if there's no resolution. Stand out of the way if you instead see prices barreling through support. Consistent daily closes outside the orange rectangles set the next potential targets, marked by red and green rectangles.

I watch the Dow Jones Transports as a foil for what I see on the Industrials and in other indices such as the SPX. Prices on the transports have been testing long-term resistance since 12/11, producing small-bodied candles with long upper shadows. Those long upper shadows are not usually the behavior that bulls would like to see, and today the DJT's candle was stronger, without that pullback. The Transports, closing at 5226.71 today, more closely approaches its 7/5 closing high of 5249.12, but it's not there yet. Each of the most recent closing highs in this zone were followed by sharp pullbacks. The Transports appear to have built a stronger base on this climb, but perhaps keep the transports on your radar screen in coming days since it's in a make-or-break zone. It tends to move fast when it moves.

Annotated Daily Chart of the COMP:

Because of recent action, daily closes between the outside boundaries of the orange rectangles don't tell us much about next direction on this index. Breakouts, marked by consistent daily closes outside one of those rectangles, will set up new potential targets, marked by the nearest green and red rectangles.

While the behavior of the previously discussed indices with respect to the 9-ema gives the chart interpretation a slightly bullish bias, that's not true of the Nasdaq. This index has chopped back and forth across the 9-ema, rendering this average useless for predictions and suggesting a choppy, trendless pattern. Today's candle was strong, and that's about all we can say conclusively.

If the Nasdaq should begin to break down by sustaining values below the 12/14 low, potential gap and Keltner support merge near 2927-2745. That potential support may not be quite as strong as the thick levels of support seen on other charts. Such a support test could be accompanied by AAPL breaking down below 500, which would damage sentiment. Support near 2880 looks stronger as does resistance near 3100, if the Nasdaq should break higher instead of lower.

Annotated Daily Chart of RUT:

With the benefit of a late-day push, the RUT charged right to the top of its orange rectangle, testing historical and Keltner channel resistance at the close. It tested and only slightly exceeded the 12/11 close of 834.99. It tested but did not exceed the potential resistance Keltner resistance on daily closes near 836-837. For now, the RUT ended the day with a double-top test, but bears must face the possibility than any sustained gap higher tomorrow morning could set a target at the green rectangle.

Bulls must face the possibility that any sustained pullback from here, particularly one that erases more than 50 percent of today's gains, sets the stage for a possible double-top setup.

For now, the chart suggests that 845-847 is a potential upside target, but a sharp downturn tomorrow would question that outlook. If 845-847 is tested, watch for the potentially strong resistance there to hold on daily closes. Glancing across the chart shows that the RUT sometimes retracts immediately on tests of that channel line. In strong momentum runs, it does the opposite: it bolts above it and uses it as support until finally losing traction.

Consistent daily closes below the red 9-ema, should they occur, target 812-818, and consistent daily closes beneath that target 790.

Annotated Daily Chart of AAPL:

By last Monday, AAPL had confirmed a pattern of daily closes beneath a turning-lower 9-ema. It had formed a potential higher low, but the chart setup suggested that unless AAPL could jump back above and close above the 9-ema, it might be pressured down into a retest of the previous low. That's what happened. One warning from last week was that the lower channel support was beginning to turn lower and prices could slide lower along that support line.

Today, AAPL sank into a slightly lower low, at 501.23, but then rebounded mightily again from its close approach to 500, as it had on 11/16. AAPL still remains below its red 9-ema and other potential resistance, however. I would watch closely any tests of the resistance marked by the closest orange rectangle if I were in bullish AAPL trades. It is possible that AAPL could again be knocked back while potential support beneath continues sinking. Bulls want to see AAPL back above that red 9-ema with sustained daily closes above it flattening that 9-ema and then turning it higher. They don't want to see AAPL instead dropping back to test support that now sinks to about 492 and will sink lower on any sharp drop.

Tomorrow's Economic and Earnings Releases

Dallas Federal Reserve Bank President Richard W. Fisher will be speaking to the Gainesville, Texas Chamber of Commerce. No information has circulated as to whether a question-and-answer session will be included.

News of fiscal-cliff discussions will of course dominate the news and market attention.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX jumped up today and set a potential upside target near 1429 when that target was first set at the first 30-minute close today. By this afternoon, when the SPX had reached that target, it had pushed it slightly higher, almost to the next target now at 1432-1435. As long as it maintains 30-minute closes above about the red 9-ema, it maintains that potential upside target. Consistent 30-minute closes beneath about 1418-1419 set a potential downside target near 1412. Inside the orange rectangle is a sort of know-nothing zone.

Further-out potential targets are marked, in case the nearby ones are exceeded by consistent 30-minute closes. It should be noticed that strong or persistent moves in any direction over many hours will push those dynamic lines in the direction of the price movement.

Bulls should note that RSI (not shown) has reached to 74.42, an area that alerts bulls to a potential for a pullback. Those who understand RSI studies know that momentum runs often begin when RSI already shows supposedly overbought conditions, but when prices face potential resistance accompanied by overbought showings on the RSI, it's a good idea to think about what-if's, too.

We have the pattern of an index rising on the back of a rising 9-ema to guide us on this 30-minute chart, too. Changes in tenor require a change in this pattern.

Annotated 30-Minute Chart of the Dow:

Just before the last hour of trading, the shape of the Dow's 30-minute chart for the day's trading suggested the look of a head-and-shoulders formation that was yet to be confirmed. The downside target would have been near 13150. It would be easy for the Dow, however, to reject that formation with 30-minute closes much above the 13210 zone, and that's what occurred. That rejection would make the upside target near 13222-13230, and that's what was hit, but the small grey channel's boundary did hold as resistance on the 30-minute close. Bulls want to see sustained progress on 30-minute closes toward the next target at the green rectangle. If there's a pop higher tomorrow morning and that next target is reached, bulls should be aware that the Dow's RSI (not shown) also reaches into possible overbought territory. The pattern of prices rising on the back of a rising 30-minute red 9-ema isn't quite as strong for the Dow, but it's strong enough to show us when there's been a change in tenor.

Sustained closes beneath the 30-minute 9-ema targets the orange triangle. Further-out potential targets are also marked.

Annotated 30-Minute Chart of the NDX:

I'm not certain when or if my charting service is going to get the daily NDX charts right again, but let's look at the 30-minute version for the benefit of those trading NDX or MNX options.

The NDX punched higher this morning but then dropped back below the green 120-ema to test the red 9-ema. This afternoon's bounce was off that potential support, and the bounce was strong enough to turn the 9-ema higher. We have a pattern to observe now, watching for changes in tenor. The day ended with the NDX up against and only slightly exceeding potential Keltner resistance on 30-minute closes, with a next target at the green rectangle if the NDX can sustain the gains and continue climbing.

That test of resistance this afternoon was accompanied by an RSI at 72, also showing potentially overbought conditions. If the NDX should need to pull back, watch for that potential support on 30-minute closes at the 9-ema. If that doesn't hold, the NDX's potential support setup looks weaker than that seen on previous two 30-minute charts. Consistent 30-minute closes beneath the red 9-ema could target 2637-2740 or perhaps even 2622-2625. Consistent 30-minute closes above today's close 2675-2680, but also watch AAPL's performance.

Annotated 30-Minute Chart of the Russell 2000:

And the RUT led the way for the other indices.

By midday, the RUT rose high enough to hit the upside target that none of the others has yet hit at the upper purple channel line and that was only the beginning. The RUT tends to lead the way and often exceeds boundaries. After hitting that target, the RUT pulled back to the red 9-ema, and then tried again, that time breaking through on a momentum run.

RSI ended at 78.31, and the RUT ended very near potentially strong resistance on 30-minute closes, with that resistance near 836-838. The RUT can and does overrun that potentially strong resistance, just as it did in the head-and-shoulders formation on Tuesday and Wednesday of last week, and it does so accompanied by an "overbought" RSI reading. Therefore, such readings are no guarantees, but we can see that they still sometimes offer warnings for bulls to prepare their just-in-case profit-protection plans.

I certainly don't count on such readings so strongly that I do not adjust for upward movements because I "know" markets are going to turn around, particularly when dealing with the RUT. However, I would and have made just-in-case profit-protecting plans when in bullish trades.

What's next? I could tell you what these 30-minute charts suggest. They suggest a pop-and-drop tomorrow morning, with the size and shape of the drop telling us much about next direction. A drop could be met with a quick rebound, or it could be fueled by weak hands abandoning stocks they just bought. The behavior with respect to the red 9-ema's would give us clues, if those averages are retested.

However, what these charts suggest is useless to us now. By tomorrow morning, we could and probably will have senators of the Republican persuasion saying that there's no way they're agreeing with Majority Leader Boehner's suggestions and senators of the Democratic persuasion insisting that the cap has to be placed on income much lower than a $1 million before they'll even talk. If so, that rainbow perhaps dissipates into the air and so does the pop.

If prices start down immediately tomorrow, watch the AAPL, the RUT, and the DJT for clues as to whether this is just a pullback before another bounce or something more serious.

If prices pop, watch for potential resistance where marked, but if scared shorts cover on each minor jot lower, we could see the next levels of resistance pierced, too, overbought conditions or not.

Watch the 9-ema's on 30-minute charts for confirmation (rising in a rally, support on 30-minute closes) or for signs of a change in tenor.

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