Market Internals

Introduction

Today global market participants woke up in a show-me-the-money mood. In China, economic releases hinted at a weaker second-quarter GDP while last week's inflation numbers may have stymied hopes for easing. Market participants asked, where's the money that's going to stimulate one of the world's important economic growth engines?

At the same time, U.S. futures traders were still digesting the implications of Friday's Wall Street Journal article concerning the U.S. Federal Reserve's easing plan. That article speculated that the U.S. Federal Reserve is planning its exit strategy for unwinding its current bond-buying program. While it shouldn't be a surprise that the Federal Reserve would plan how that program might be unwound, any such talk makes equity markets jittery. U.S. market participants want to be shown the money and, moreover, assured that it will be in evidence well into the future. Renewed speculation that easing could stop by the end of this year or even by the end of the summer, as a few experts posit, heightened concern and sent equities.

For about thirty minutes.

Then most recovered and bounced off their lows. The ESM showed Cyprus the money, disbursing the first tranche of financial assistance. Perhaps that contributed to a knee-jerk reversal of early losses on relief that many of the EU's member countries were going to collapse one after the other in domino effect. A better explanation might have been calls for upward revisions of U.S. GDP expectations this morning or just the typical buy-the-dip pattern that has been in place. Despite advancers that had been weaker than decliners, both the SPX and RUT headed up to new record highs. Only one of the two was to close in the green, however.

The SPX gained 0.07 or 0.00 percent on its way to a new record high. The Dow dropped 0.18 percent, but the NDX gained 0.04 percent. The RUT dropped 0.14 percent, and the SOX, a heftier 1.00 percent. The VIX dropped 0.56 percent but both the RVX and the VXN were up, 0.84 and 2.09 percent, respectively.

Gold futures (/gc) for June delivery settled 2.3 lower according to CMEGroup settlement prices. They pulled back amid concerns about demand from India. Today, the Royal Bank of India said that banks cannot import gold bullion on a consignment basis. Dealers reportedly stopped the sales of gold to jewelers. Copper (/hg) prices for June delivery gained 0.0075 after initial weakness due to demand concerns relating to China. Silver (/SI) for July delivery gained 0.038.

Crude (/cl) dropped to close the open outcry session at 95.12. Output increased among OPEC countries and demand dropped in China.

Volume was tepid once again.

Monday's Developments

Asian bourses turned in mixed performances. Friday, the yen dropped further against the dollar, with the USD/JPY pairing climbing above 100. The last two times the pairing was at this level was in October, 2008, and then briefly in early 2009 as the pairing rose to retest this level again before falling away into last year's 75.56 low.

With the weakening of the yen against a strengthening dollar, Nikkei 225 equities have been rising. After achieving a high not seen since 2008 on Friday and after the Group of Seven this weekend avoided singling out Japan for currency manipulation, the Nikkei 225 jumped one percent at the open last night. It closed 1.20 percent higher. The Hang Seng, however, dropped 1.42 percent, and the Straits Times, 0.43 percent. News from China may have colored their performances.

China's Shanghai Composite percent dropped 0.22 percent. In China, Fixed Asset Investment measured 20.6 percent rather than the anticipated 21.1 percent, and Annual Industrial Output rose 9.3 percent rather than the hoped-for 9.5 percent. Both numbers disappointed. Some experts speculate that the disappointing annual economic activity will lead to a lower-than-expected Q2 GDP, although not all agree. To complicate matters, last week's higher-than-expected inflation may have quashed speculation about easing. Where's that money to stimulate China's economy into hyper mode again?

In Europe, market watchers speculated that the ECB could lower one of its key interest rates below zero in an effort to convince banks to lend. Germany's finance minister opposes ECB purchases of asset-backed securities while Spain's prime minister urges the European Union to act with alacrity. Amidst the speculation, the euro had been weakening against the dollar. Last week, the EUR/USD dropped to a multi-week low before recovering slightly. European equities had reacted as equities often behave when their underlying currencies weaken: they climbed.

Today, as the Eurogroup met, European bourses started out with gains but soon dipped into negative territory. Most climbed off their morning lows by the day's close with the EUR/USD again weakening. The FTSE 100 closed near the flat line, up 0.02 percent. The DAX eased 0.03 percent, and the CAC 40, 0.22 percent. Spain's IBEX 25 dropped a more substantial 1.03 percent, and Italy's FTSE MIB, 0.65 percent.

After the European markets closed, the Eurogroup announced that Greece will also receive its next tranche of aid. This tranche totals 7.5 billion euros, with about 6 billion due next week in redemptions.

Although speculation about global easing policies and any effects on currency moves garnered the most attention today, U.S. market participants did have several economic releases to examine. Today's U.S. economic releases began with April's Advance Retail Sales. This number includes retail and food services and is adjusted for seasonal factors but not for price changes. Experts expected -0.3 percent, a drop a little less than the prior reported -0.4 percent. Retail sales surprised, rising 0.1 percent instead of dropping. However, the prior 0.4 percent drop was revised to a 0.5 percent decline. Although sales were nearly unchanged from the prior month, they were 3.6 percent higher than the prior April's numbers. Excluding motor vehicles and parts, however, total sales dropped 0.1 percent.

As might be expected in April, building materials, garden equipment and supplies dealers saw sales jump 1.5 percent. Clothing and clothing accessories benefited from the season, gaining 1.2 percent. Non-store retailers' sales jumped 1.4 percent. Maybe some customers were buying ahead of legislative action to impose sales taxes on online sales? However, food and beverage stores, health and personal care stores, and gasoline stations all saw sales decline.

Shortly after the retail sales results were announced, analysts raised estimates for U.S. Q2 GDP. Goldman Sachs raised its "tracking estimate" to 2.1 percent from the prior 1.8 percent. JPMorgan raised its estimate for the US second-quarter GDP from 1.5 percent to 2.0 percent. Both firms attributed the action to the retail sales' result.

In conjunction with the release of the Retail Sales, the Census Bureau announced an "Intention to Revise." The results of the 2011 Annual Retail Trade Survey, new seasonal factors and the inclusion of a new sample prompt the revision of adjusted and not adjusted estimates. Revisions of the Advance Monthly Retail Trade Report, Monthly Retail Trade, and Latest Quarterly E-Commerce reports will be released May 31, 2013. At 10:00 March's Business Inventories were reported as flat, with the prior 0.1 gain also revised to a flat level. Analysts had expected a gain of 0.3 percent, but perhaps those better than expected retail sales depleted inventories more than expected. The inventory/sales ratio was 1.29, slightly higher than the year-ago level of 1.26. The U.S. Census Bureau also announced its intention to revise these numbers to include new samples and new seasonal factors and incorporate the results of that 2011 survey.

Moody's weekly Business Confidence Survey eased to 30.2 after two weeks of modest gains. This report appeared at 10:00 am ET.

In other market news, Pimco's Bill Gross tweeted again about the end of the 30-year bull market in bonds. Just because the bull market may have ended, a bear market in bonds has not begun and might "never" begin, he clarified. A bear market would begin only when 2-3 percent real and 4-5 percent nominal GDP growth is sustained. Ten-year and thirty-year yields climbed today along with the dollar.

Story stocks today included Monsanto (MON, 106.83, down 1.29 or 1.19 percent), with the company receiving a favorable court ruling. This case involved the use of Monsanto's patented genetically altered soybeans. A farmer who had previously bought Monsanto's genetically altered seed for a first crop then bought a mixture of seeds from a grain elevator. These were seeds destined for animal feed, industrial use and food processing. Monsanto claimed that the farmer knew that some of those seeds were likely to be the ones genetically altered to tolerate spraying with Roundup. He planted them and sprayed them with Roundup, then saved the seeds of the ones that survived the spraying. Due to the contracts he had signed with Monsanto, is now ordered to pay Monsanto for the seeds he obtained in this manner. Justice Elena Kagan emphasized that the "holding today is limited." It did not address all self-replicating products such as those involved in vaccines, cell lines and software, as some had believed it would do.

Take-Two Interactive Software (TTWO, 16.39, down 0.05 or 0.30 percent) jumped in after-hours trading after the company reported net income of $0.24/share on revenue of $299.5 million. In the year-ago period, the company had a net loss of $0.79/share on revenue of $148.1 million. Adjusted earnings, at $0.38/share, handily beat expectations of adjusted earnings of $0.23/share. Adjusted revenue of $303.1 million also beat expectations of $279.5 million. The company attributed the beat to the strong performance of "Bioshock Infinite." Although no major titles are scheduled for be released this year, the company's new projected revenue range for the year is $1.75-$1.85 billion, with the average above the prior projected $1.78 billion. As this article was edited for publication, the stock was last at 17.19, up 0.80 from the close.

Google's (GOOG, 877.53, down 2.70 or 0.31 percent) new manager of the Android division denied that an integration of Chrome and Android will be announced at that Goggle I/O developers' conference. The conference takes place this week. Nokia (NOK, 3.84, up 0.18 or 4.92 percent) and BlackBerry (BBRY, 15.88, up 0.34 or 2.19 percent) also have events this week, with NOK presenting its newest Lumia smartphone tomorrow. BBRY's CEO will be presenting tomorrow at a BlackBerry Live event in Florida.

Dell (DELL, 13.53, up 0.07 or 0.52 percent) asked for more information about Carl Icahn's takeover proposal. The most recent offer by Icahn and Southeastern Asset Management Inc. was termed an alternative takeover proposal. Dell's management wanted to know if it was the actual proposal the board could consider or only an alternate one in the event that the Silver Lake Partners deal under current consideration isn't approved.

Nordic American Tanker (NAT, 8.65, up 0.03 or 0.35 percent) reported earnings that missed. The company reported a loss of $0.43 per share, more than the anticipated loss of $0.26 per share. The company declared a dividend of $0.16 per share. The company noted signs of improvement in what was still deemed a "challenging" environment for tankers. The company said that the world economy needs to continue to recover before vessel demand and rates will increase, but that such increases could happen quickly.

Oops. Bloomberg News' editor in chief said today that journalists had access to client data about how Bloomberg terminals were used, but he claimed the access was limited and important customer data protected. Bloomberg is closely held by Thomson Reuters.

The ECB wasn't satisfied with that assurance, and the U.S. Federal Reserve and Treasury Department also wanted to know more about exactly what information was leaked via those Bloomberg terminals. Examples of the leaked data apparently included learning when a client had looked at information on bonds or equities, as well as information on the clients' login histories. The leaks also included aggregated data that did not leak "specific security information." No trading or portfolio information was leaked, the company said. Goldman Sachs blew the lid on Bloomberg News.

In India, ElectraCard Services admitted that hackers raised credit limits on prepaid cards then used those cards to steal from global banks in coordinated attacks on ATM machines. No customers' encoded data or pin numbers were compromised, the company claims. ElectraCard services was only one of the two companies where limits were raised on prepaid cards, according to a Reuters article. The coordinated ATM attacks resulted in a combined $45 million in withdrawals from two Middle Eastern banks in December. The cards processed by ElectraCard Services were allegedly responsible for $5 million of that, and the cards processed by EnStage, a company incorporated in California but operating out of Bangalore, was allegedly responsible for $40 million. MasterCard (MA, 555.84, up 0.71 or 0.13 percent) owns 12.5 percent of ElectraCard. MA did not appear to be adversely impacted, but this "news" may be old news.

After the horrendous death toll in Bangladesh's building collapse, at least four major retailers have said that they would assume costs of improvements in fire and safety in that country. WalMart (WMT, 78.50, down 0.39 or 0.49 percent) and Gap (GPS, 40.29, down 0.70 or 1.71 percent) were expected to do so, too, but had not yet announced that they would sign on as this article was edited for publication. Companies signing the document will be expected to pay as much as $500,000 a year to the fund the improvements. One expert said that WMT is the second-largest buyer of apparel produced in Bangladesh.

In geopolitical news, North Korea's leader Kim Jong II appears to have replaced his defense chief, General Kim Kyok Sik, with a little-known younger army general, Jang Jong Nam. Experts speculate that the effort is an attempt to consolidate his leadership by installing a younger general. The replacement should not be interpreted as a sign that North Korea will soften its hardline opposition to South Korea and the U.S., those experts warn.

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:

We know the pattern bulls want to see on the SPX and other indices: strong bounces off tests of the red 9-ema followed by 3-5 sideways-to-sideways-up, small-bodied candles. The last step is a quick dip to retest the red 9-ema before the pattern repeats. Since May 8, we have been seeing the sideways portion of the pattern on the SPX and some other indices.

In the normal course of this rally pattern, it would soon be time for the SPX to dip and retest the sharply rising red 9-ema, probably by Wednesday or Thursday. However, the SPX is in breakout mode on the daily chart, pulled above all Keltner channels. Price moves prove more unpredictable when the entity is in breakout mode. The SPX could as easily zoom upward, skipping the seemingly due 9-ema retest, or it could plunge right through that 9-ema without stopping.

If such a red 9-ema retest occurs and the SPX bounces sharply to a new high after that test, the rally mode continues. However, this daily chart offers no further upside potential targets. The weekly chart suggests a next potential upside target of 1675. Bears should be aware of that potential target as long as the SPX continues to find support on daily closes at or above a rising red 9-ema. Bulls, however, should not count on such a target being reached but should guard bullish profits amid renewed talk of an end to easing sooner rather than later.

If the SPX retreats, a failure to find support on daily closes at the red 9-ema could retest the next downside target at about 1594-1606. A successful holding of daily closes at or above this zone followed by a bounce still constitutes a bullish pattern for the SPX. If 1594 support should fail, however, lower potential targets are marked. It would be a failure of support from about 1560-1575 that would mark a much more bearish climate.

Annotated Daily Chart of the Dow:

The Dow is also in breakout mode on the daily Keltner chart, pulled above the normal outside channel boundaries. Bulls want to see the Dow continue to find support on daily closes at or above a sharply rising red 9-ema. No further potential upside targets are suggested by this daily chart, but we can look to the weekly chart. That chart suggests an upside target of 15475-15800, a possible target made more viable if continued daily closes are at or above the red 9-ema. Bears should be aware of this possible upside target, but bulls should not count on it being hit. Entities in breakout mode sometimes crash abruptly.

Entities in breakout mode sometimes melt upward, too, so there's no assurance that the Dow will obey normal patterns for rallies. It might just melt upward again without retesting the red 9-ema. However, as with the SPX, a more normal pattern would see the Dow retesting the 9-ema by Wednesday or Thursday. Bulls want to see daily close support hold there or at least by 14800, where the grey channel's support might lie if prices retreat. Lower potential targets are marked if that support does not hold on sustained daily closes. Daily closes below 14500-14512 would mark a significant change in the Dow's pattern this year.

Annotated Daily Chart of the NDX:

The NDX looks overdue for a pullback to the red 9-ema. Prices have pulled well ahead of this moving average, and gains have been produced in 12 of the last 16 days. While that's no guarantee that the NDX will pull back, bulls should prepare for that possibility. As long as the NDX maintains daily closes at or above the red 9-ema on pullbacks and then bounces from that average, it maintains a potential upside target just above 3000.

A failure to hold support at the 9-ema targets a pullback further through the orange rectangle, toward stronger support in the 2900-2916 range. Daily closes below 2900 or closes near 2900 that then find significant resistance on a bounce back to 2945-2950 will undo that potential 3000-ish upside target. A failure to hold support near 2900 sets a new downside target instead, near 2833-2867. Lower potential downside targets are also marked, if needed.

Annotated Daily Chart of the RUT:

The RUT is not in a full-out momentum run as far as the Keltner channeling system is concerned. It's been finding resistance on daily closes at or near the outer boundary of its Keltner channels, now near 977-978.

If the RUT should shoot up through this boundary on a tall-bodied candle and not retreat the next day, the weekly chart suggests a potential upside target of 1025-1075. However, we all know, don't we, that the round-number 1000 level will provide psychological resistance if not historical or Keltner resistance?

The RUT has been employing a definite "sideways up" cast to its consolidation since it broke above 960. Still, in the normal course of events, it would be time by Wednesday or Thursday, at least, for the RUT to retreat to retest its rising red 9-ema. Holding support at or above that moving average and bouncing from it would be part of its normal rally pattern.

Even a drop to 933-947 wouldn't do too much damage to sentiment, especially if support kicked in near the top rather than the bottom of that zone. However, consistent daily closes below the bottom of that zone would be a departure from the RUT's pattern for this calendar year and would target the next marked lower potential target zone.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports often lead the pack, and they may be leading the pack into a red 9-ema retest with today's close approach. Was this approach close enough? The transports usually dip all the way to the red 9-ema before bouncing. That's no guarantee they will this time, of course.

This is not an optionable index, so we're not watching it in order to trade it. Rather, we use it to assess the economy's health and general trading sentiment. Therefore, bulls and bears alike may want to watch the transports' performance with respect to the red 9-ema.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

After today's initial weak first 30-minute candle, most 30-minute closes were at or above the red 9-ema. That 9-ema flattened by this afternoon, however as prices churned sideways. Short-term bulls would have liked to have seen stronger action that kept the average turning higher.

By the close, the SPX looked as likely to drop toward 1625-1630 potential support as it did rise into 1635-1640 resistance. Short-term bulls can still feel comfortable as long as 30-minute closes remain above 1625 or perhaps last Thursday's lows, but consistent closes below that target 1616-1621. They would mark a change in the short-term tenor. A next lower target is also marked in case 1616 should be breached on consistent 30-minute closes.

Annotated 30-Minute Chart of the Dow:

The Dow's action also flattened its 30-minute red 9-ema rather than keeping it turning higher in full-out rally mode. By the end of the day, the Dow looked as likely to drop into 15050-15070 potential support as it did climb up to test 15125-15175 potential resistance. Sustained 30-minute closes below about 15050 target the next potential support zone, near 14960-1500, and mark a change in short-term tenor. A lower next potential target is also marked, in case that 14960 zone fails to provide support.

Annotated 30-Minute Chart of the NDX:

Like the SPX and Dow, the NDX's action flattened its red 9-ema rather than keeping it moving higher in full-out rally mode. That action renders it as likely that the NDX could drop toward 2962-2972 as climb up toward 2988-2922 potential resistance. Past that 2922 zone, 3000 will be singing a sweet tune to excited market participants.

If the NDX drops into that next support zone instead and doesn't hold support there on 30-minute closes, we're seeing at least a slight change in short-term tenor. Such action sets up a potential downside target from about 2940-2952. Failure to hold support there on consistent 30-minute closes would target the next downside target marked on the chart.

Annotated 30-Minute Chart of the Russell 2000:

While other indices were flattening their red 9-ema's, the RUT was producing 30-minute closes at or beneath a rolling-lower red 9-ema. On the surface, that gives the edge to a dip toward next support over a rise to next resistance, unlike the equal chances for either on the other indices. That outlook can be erased by a gap up tomorrow morning, however.

If the RUT climbs tomorrow, resistance might be found from about 974-978, where potential Keltner resistance might be pushed on a move higher tomorrow morning. A test of support and subsequent failure to hold support on 30-minute closes at or above about 968 targets the next potential support zone, from about 960-965, and would constitute at least one sign of a change in tenor over the short-term. Further potential downside targets are marked, if preceding ones are violated on consistent 30-minute closes.

I wanted to comment on all these downside targets and few upside targets on these charts. Am I marking more downside targets because I'm more bearish than bullish? No, this is a factor of the strong climbs that ran through all upside targets, leaving none to mark. The presence of more downside targets doesn't guarantee that they'll be hit, but it does serve as a reminder to us all that prices have been overrunning boundaries for quite a while.

Seventeen consecutive Tuesday's have produced Dow gains. Will tomorrow be another such Tuesday or will that pattern dissipate now that everyone knows about it? As I was studying daily charts and typing potential upside targets such as "just above 3000" for the NDX and figures above 1000 for the RUT, I wondered if these new siren calls will seduce investors and traders the way SPX 1500 and 1600 and Dow 14000 and 15000 have done these last few months. Obviously, I don't know what will happen tomorrow. All I can talk about are patterns and probabilities, and we've got a pattern that should be asserting itself soon, with the emphasis on "should." In the regular course of trading, indices are all due this week for a pullback at least to their red 9-ema's. If that pullback should occur, the behavior with respect to those retests will give us more clues about what happens next.