Market Internals

Introduction

After global weakness last night and renewed sequestration and budget headlines Sunday and today, U.S. bourses soldiered on. They managed to gain ground or at least keep losses to a minimum. Some indices such as the Dow Jones Transports made strong gains. That index must be steel clad, moving forward no matter what kind of bombardment it receives.

The SPX gained 0.46 percent after being in the negative earlier in the day; the Dow, 0.27 percent; and the NDX, 0.43 percent. The RUT gained 0.21 percent, but the SOX dropped 0.25 percent. IDC projected that the market for PCs would decline again this year. The semi book-to-bill number was due out this afternoon, but the number didn't appear to have been released as this article went to publication.

The BKX, the KBW Bank Index, gained a much heftier 1.18 percent, gaining as international bankers met in Washington, D.C. The Dow Jones Transports gained 1.00 percent. WTI crude futures closed below the round-number 90.0 level, dropping for the third day in a row. Gold futures also continued their drop off the 2/26 rebound while silver managed a mostly sideways move today.

Monday's Developments

Most Asian bourses tumbled lower in overnight trading. Experts in attributed the weakness to China's higher down-payment requirements for buyers of second homes in cities where prices are deemed to be rising too quickly. Evidence of slower growth in spots across the globe also contributed, experts felt. One of those areas was China itself, with the services PMI weaker than expected.

China's Shanghai Composite fell 3.65 percent. The Hang Seng dropped 1.5 percent, and the Straits Times, 0.90 percent. Japan's Nikkei 225 bucked the trend, gaining 0.40 percent; however, even the Nikkei 225 closed well off its high of the day, dropping from about 10:00 am in its trading day.

Dire euro-crisis headlines filled forex news source listings again today. Statements from France's finance minister claimed that France can't meet its 2013 deficit target, for example. These dire headlines constitute anecdotal evidence that global investors are again paying attention to what's happening in Europe and the U.K. Lately, big currency moves precede or accompany big moves in equities and commodities. Amid ongoing Eurogroup meetings, European traders tried to make sense of conflicting data.

Spanish unemployment numbers showed far lower numbers of unemployed than had been expected, but the eurozone's Sentix Investor Confidence and the U.K.'s Construction PMI were worse than anticipated. Morgan Stanley cut European financials to a "modest underweight" rating, saying that the risk/reward outlook on European equities had deteriorated. Russell Investments reclassified Greece as an emerging market. Most European markets opened under water, but the stability in the U.S. markets when they opened seemed to improve sentiment in Europe, too. Many European indices climbed off their lows, some into positive territory.

The FTSE 100 percent closed lower by 0.52 percent, and the DAX closed lower--while well off its low of the day--by 0.21 percent. The CAC 40 climbed steadily off its early morning low and managed a close in positive territory, up 0.27 percent. Helped by fewer unemployed than expected, Spain's IBEX 25 also climbed steadily off its opening lows and managed a positive close, up 0.72 percent. Italy's FTSE MIB climbed off its lows with the other European indices, but then its components were hit by selling as soon as this index achieved the flat-line level. The FTSE MIB closed lower by 0.85 percent. Italy's government remains in limbo with the upper house's leadership in gridlock.

Not long after U.S. markets opened, speculation began appearing that S&P would downgrade Italy's sovereign debt this evening, and the EUR/USD currency pairing took a hit as soon as the rumors began gaining traction. As this report was prepared, no such downgrade had surfaced, so the rumors may have been just rumors. After the Eurogroup meeting concluded, news circulated that a small group of the Eurozone countries' officials were meeting in Cyprus and news began appearing about when a bank audit can begin.

Federal Reserve Governor Janet Yellen spoke in Washington, D.C. before the market open, saying that the Fed should continue quantitative easing. Although she admitted to some "costs" for the program, she believes the balance of costs and rewards still favors a "highly accommodative monetary policy." Some experts speculate that this Fed Governor could replace FOMC Ben Bernanke if he decides not to pursue another term.

Shortly after the open, the Institute for Supply Management released its New York City Report on Business. The report touted business activity expanding at the fastest rate in eleven months, at 58.8. This was in line, however, with the year-ago February 2012 report at 59.0. The six-month outlook was 64.1, the highest number since last March, but it was below last February's number of 70.1. The NY-BCI, a cumulative diffusion index, was 572.7, well above the year-ago 542.4. Employment fell, however, to a nine-month low, and was in contraction mode at 49.3 although companies mentioned skilled labor shortages as an impediment to business. Working capital shortages were listed as the biggest impediment. Prices paid rose.

At 1:15 pm CST, Federal Reserve Governor Jerome Powell spoke at the same International Bankers Conference that Fed Governor Yellen had addressed earlier in the day. He talked about the progress regulators had made in developing the tools needed to break apart large, failing financial institutions. Currently, "too big to fail" institutions in effect receive a subsidy, he said. Since he was speaking before the Institute of International Bankers at a conference, there must have been some degree of unease in the room. He said that he and the committee working on the problem see "a world in which the equity is wiped out, the creditors bear losses, the senior management bears the loss of their job and quite possibly a lot else." He prefers giving the current considered policies time to work rather than utilizing government-imposed breakups. So maybe there wasn't much quaking in that room after all. An intraday chart of the financial-related index, the BKX, shows that it broke out of its consolidation pattern at about the time he began speaking.

Later in the day, U.S. Senator Vitter said that he will require banks to have higher capital but doesn't plan to split any. Senator Vitter, a Republican from Louisiana, serves on the banking committee.

Other global news included a heating up of rhetoric aimed toward Iran. Yukiya Amano, director-general of the International Atomic Energy Agency, stated that because Iran refuses to cooperate with inspectors, the IAEA cannot conclude that all the nuclear material in Iran's control is being utilized for peaceful activities. That's not a surprise, is it? The United States and Saudi Arabia joined him in urging Iran to "proceed with a sense of urgency" to cooperate, while Israel reiterated its threats of pre-emptive war if no progress is made. The latest meeting concluded with Iran agreeing to meet again.

Talks are ongoing here in the U.S., too, between President Obama's administration and GOP officials. Little can be accomplished by hashing out the details of the parries each side makes until something concrete is accomplished. Republican House members introduced a new $982 budget bill. What does seem a done deal are cutbacks on social safety net programs for the elderly, disabled or poor.

Other developments occurred in the governmental realm. President Obama said he would nominate nuclear physicist Ernest Moniz to lead the Department of Energy and air quality expert Gina McCarthy to head the Environmental Protection Agency. In addition, he is expected to nominate the head of the WalMart Foundation, Sylvia Mathews Burwell, to direct the White House budget office. President Obama has stated goals of moving forward with clean air technology and lessening dependence on foreign oil.

Story stocks included Apple (AAPL, 420.05, down 10.42 or 2.42 percent). Market watchers speculate on the success of the rumored iWatch. Bloomberg opined today that this could produce a strong revenue stream for the company and included purported functions it might include, but that wasn't enough cheering, apparently, to stop today's slide.

Google (GOOG, 821.50, up 15.31 or 1.90 percent) may have replaced AAPL as the darling among momentum traders. GOOG hit another all-time high early in the trading day and closed near its high of the day.

Transocean (RIG, 52.19, up 0.04 or 0.08 percent) also merited listing among the story stocks. The company reported earnings of $0.91/share and revenue of $2.33 billion, with EPS topping the estimates of $0.80/share and revenues falling shy of the anticipated $2.38 billion. Out-of-service time for drilling increased, contributing to a decrease in contract drilling revenues. Day rates for that drilling rose, however. The board of directors also will recommend that a dividend of $2.24/share be paid in four quarterly installments, beginning in June 2013 and concluding in March 2014. Later in the day, activist Carl Icahn says he still wants a $4.00/share dividend.

The company also plans to accelerate debt repayment, among other plans. However, when announcing earnings, the company also had to deal with the bolt issue detailed by Jim Brown in Oil Slick.

Bolts on several blow-out preventers on some companies' rigs were found to be defective and leaking. Undersea inspections found leaks on additional wells, prompting the need for drillers around the world to pull and inspect those bolts. The BSEE is requiring rig operators to suspend operations until the bolts can be pulled, inspected and then recertified by a third party if leaking and needing replacement. In its earnings announcement, RIG said that the bolts replacement would likely lower liquidity targets from a range of $5.0-6.0 billion to one of $3.5-4.5 billion. In addition, up to three of RIG's deepwater rigs could go into a master limited partnership due to a partial settlement in the Macondo case.

In other news, A. Schulman (SHLM, 31.19, up 0.07 or 0.22 percent) proposed that it would pay $3.25 in cash and $3.25 in SHLM common stock for each share of Ferro (FOE, 6.80, up 1.60 or 30.77 percent) common stock. This offer, one in a several-years-long effort to acquire FOE, appeared in a letter dated February 13, 2013. Ferro's board has apparently rejected the offer, expressing a desire to remain independent, but SHLM has lots of free cash flow and still wants the company. Today's announcement by SHLM was a plea to Ferro reconsider their rejection of the offer. FOE jumped well above the $6.50 offer price.

IBM (205.19, up 2.28 or 1.12 percent) made gains. The company announced that its Cloud software and services would be based on open standards. Experts see the company as positioning itself against Amazon.

Let's look at daily charts. Although we saw big intraday moves last week, they were in the context of choppy movements roughly circumscribed by the congestion zones chopped out before the February push to new highs. Last week's Monday Wrap had suggested that the indices might need a few day's chop within those zones before next direction was decided.

The Dow Jones Transports were one exception to that description of chop within those prior chop zones. The Transports moved up to challenge the prior February intraday and closing highs, and today they moved up again to another new high. Since the Transports tends to lead, this is an index that should be watched.

Charts

Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

Last Monday, the chart setup showed that if the SPX was going to resume its strongest rally pattern, it needed to scramble back above the red 9-ema within a few days and then maintain daily closes above it, turning it higher again. That's exactly what the SPX did. The chart also suggested, however, that the SPX's price moves could be circumscribed by support and resistance zones that would set up a sort of chop zone of a few days, at least. That would be akin to what was seen in late January and early February, before the indices pressed up into the February highs. The SPX roughly met that outlook, too. Attempts to move above about 1520 were met last week with selling. Would the SPX and other indices follow the Dow Jones Transports' lead and eventually challenge the February high?

Today, the SPX again tested the red 9-ema and again found support on that moving average. That alone would mean that the SPX theoretically maintains an upside target at the higher yellow rectangle, from about 1530-1540. Moreover, the selling that started after the bond market closed this afternoon was followed by buying in the last minutes of the day, closing the SPX back above that 1520 resistance zone. Theoretically, the next upside target is found at the orange rectangle. However, bulls should have profit-protecting plans in place now and especially in case that zone should be tested, as resistance may be strong in that double-top zone. A next potential upside target is marked by a green rectangle in case the SPX should punch through that resistance.

It wouldn't take much to produce closes back below that red 9-ema or flatten that 9-ema and turn it lower again. If that should occur, the next potential Keltner downside target is in the zone that we would know to watch even if there were no Keltner channels on this chart. It's near last week's low. If the SPX should turn down again, bears should have profit-protecting plans in place in case there's a bounce from that zone. However, a strong break through that zone with consistent daily closes beneath it targets the 1450-1467 area.

Watch the Transports. They've already approached and slightly surpassed the double-top level. Bulls don't want to see the Tranports turn lower immediately tomorrow morning and trend lower all day.

Annotated Daily Chart of the Dow:

The Dow also scrambled back above its red 9-ema and managed daily closes above it. It rose to a new recent closing high, but by Keltner standards that closing high did not push the Dow convincingly above Keltner marked Keltner resistance.

Helped by strength in its sister index, the Dow Jones Transports, the Dow Jones Industrials has continued pounding at that resistance marked by the orange rectangle on the daily chart. If it breaks through on consistent daily closes, it targets the zone marked by the green rectangle.

If weak hands grow discouraged by a failure to break through or if a breakthrough is met by strong selling, next potential support on daily closes is of course at the red 9-ema. If that support fails, especially on daily closes, the highest red rectangle marks the next downside target and area for potential support on daily closes. Other lower potential targets are marked if that zone should be tested and its support fail on daily closes.

Annotated Daily Chart of the NDX:

Last week, the NDX didn't look as convincing as the previous two indices in its efforts to maintain daily closes back above a turning-higher red 9-ema, but we know that the 9-ema hasn't served well as a bullish/bearish benchmark for several months. The only benchmark it's been is to help us determine whether the NDX has mounted an actual rally or is just chopping around. The NDX has been carving out a sideways pattern rather than convincingly trending higher this year. Week before last, it jumped up to test the upper boundary of a broadening formation. Last week, it dropped to widen that broadening formation to the downside.

Therefore, can we really trust today's strong gain on the NDX, or is this just part of the chopping around pattern seen on the NDX? I would reserve judgment, being prepared for anything. Potential next upside and downside targets are marked, but it's impossible to give any preferred weighting to one or the other.

Annotated Daily Chart of the RUT:

Last week, the RUT did a little better job than the NDX had at turning its red 9-ema higher again, but only if the observer squinted. Daily closes were at or above the 9-ema, however, so it met the minimal requirements for resuming its rally pattern, and today, it also met that minimal requirement. It has risen close to potentially significant resistance. Bulls should have profit-protecting plans in place.

Theoretically, the RUT maintains an upside target marked by the green rectangle. It's not demonstrating the strong bullish behavior that it did in the early part of the year after crossing back above the red 9-ema, however. It's attempted resumption of its previous trend looks a little weakened by comparison. It would not take much for the RUT to either resume that pattern or else slip beneath the red 9-ema on daily closes and soon retest the next downside target, where potential support on daily closes exists. If that support is broken on consistent daily closes, a sharp drop could result. A potential downside target is marked on the chart.

Annotated Daily Chart of the Dollars:

One other entity did resume its rally, however, and that entity is the dollar. Currency moves have proven important--and exaggerated--over the last week. They've been important, but not predictive in the usual manner of late.

Intermarket relationships shift from time to time, but over the last several years, a rising dollar has pressured dollar-price securities such as crude, gold, and U.S. equities. Certainly, those energy and metals have been pressured lower as the dollar rose over the last week. However, Friday's boost in equity prices was accompanied by a new recent high in the dollar, and neither pulled back significantly today. Were intermarket relationships shifting or was the dollar's rise presaging a downturn in equities?

If it was presaging a downturn in equities, equities forgot to get the note outlining their expected behavior. Once again the dollar's climb has outstripped its rising 9-ema, running much further above that moving average than it typically does. It may be time for some consolidation or a pullback in the dollar, but these currency moves are driven by geopolitical and geo-economic developments that aren't always predictable in the normal manner. Watch the dollar or maybe the USD/JPY and EUR/USD pairs for big moves. Another spurt higher in the dollar could pressure equities if the normal recent intermarket relationships stay true, while a pullback could release pressure on equities. Just be aware that they don't always interact this way throughout history.

Keep the Dow Jones Transports, the $DJT, on your radar screens, too. Bulls want to see the Transports break maintain closes above the 2/19 closing high of 6020.67 on consistent daily closes. Bears want to see the Transports roll over now and sink back below the rising red 9-ema in preparation for a retest of last week's low.

This Week's Economic and Earnings Releases

Since Jim Brown's listing of upcoming economic events is so complete, I've carried forward the chart from his weekend Wrap.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The chop is flattening several central averages around which the Keltner channels are arranged on this 30-minute chart. The SPX is chopping around mostly above those averages, with a few excursions up or down. The setup of the chart suggested a test of the upper boundary of that purple channel but doesn't strongly suggest a breakout. Unfortunately for traders trying to decide the direction of the next intraday move, nothing meaningful is decided until the SPX breaks decidedly above, on consistent 30-minute closes, the upper purple channel boundary or decidedly below, on consistent 30-minute closes below the lower purple channel boundary. Until that happens or until we have defined bullish or bearish formations set up and confirm, the movements inside the purple channel now look like chop. Right now, it's chop in the upper or bullish half of the purple Keltner channel, but we can see from last week's action how quickly that can be reversed. I'm hesitant to label this behavior too bullish just yet. At the end of the day, the upturning red 9-ema was serving as support on 30-minute closes, so bulls want to see that trend continued as this next resistance is approached.

If breakouts occur, next potential targets are marked. Remember that time and strong movement will move these dynamic channel boundaries.

Annotated 30-Minute Chart of the Dow:

Ditto. The flattening central averages and channels and the zigzags within those channels suggest that the movements inside the purple channel lines are choppy movements that aren't particularly predictive of next market action. We may see some sort of clearly bullish or bearish formation, confirmed or rejected, that gives us a clue, but our usually trustworthy friend, the red 9-ema, just proves to us that we're seeing chop, not trend. Late in the day, it appeared that a trend was beginning, but whether that's going to persist beyond the upcoming test of the upper channel boundary remains uncertain.

If breakouts occur, next potential targets are marked. Remember that time and strong movement will move these dynamic channel boundaries.

Annotated 30-Minute Chart of the NDX:

Ditto. If breakouts outside the purple channel occur and are confirmed by consistent 30-minute closes outside the boundaries, next potential targets are marked. Remember that time and strong movement will move these dynamic channel boundaries. At the end of the day, the upturning red 9-ema was serving as support on 30-minute closes, so bulls want to see that trend continued as this next resistance is approached.

Annotated 30-Minute Chart of the Russell 2000:

Ditto. Or, is this triple ditto by now? If breakouts outside the purple channel occur and are confirmed by consistent 30-minute closes outside the boundaries, next potential targets are marked. Remember that time and strong movement will move these dynamic channel boundaries. At the end of the day, the upturning red 9-ema was serving as support on 30-minute closes, so bulls want to see that trend continued as this next resistance is approached.

What about tomorrow? Market participants will be reacting to the ISM and developments in Asia and Europe. More than that, perhaps, they'll be positioning for the ADP on Wednesday morning, before the open. Indices often have a way of clamping down, positioned near important resistance or important support. Where they're positioned might provide a glimpse into where market participants would most like to see prices go and where they're guessing they might go, but they can be wrong if the numbers that are so important prove different than anticipated. Don't fail to make necessary adjustments, but do try to make those as conservative as possible in case there's a reversal back through that purple channel in the next few days.

As a final helpful hint, keep a watch on this chart for guidance: