Market Internals

Introduction

Apple devotees weren't impressed with the products and software changes the company unveiled today at the Worldwide Developers Conference. Neither were investors impressed enough with the indices' bounce off last Thursday's low to do anything more than produce small-bodied candles. Those small-bodied candles indicate indecision.

A glance at the volumes on the exchanges show low volumes as the indices produced those candles. At the end of the day, the SPX had dropped 0.3 percent; the Dow, 0.06 percent; and the NDX, 0.01 percent. The RUT managed an outsized climb of 0.51 percent, and the SOX gained a similar 0.53 percent. The important Dow Jones Transports, however, dropped 0.21 percent.

Jim Brown mentioned this weekend that copper was not predicting strong global economic growth, and today saw prices dip into a three-week low. Copper prices (/hg) for July delivery dropped 0.275 to settle at 3.2410. They ended up not far below the May 15 close at 3.2635, however. Gold futures (/gc) for July delivery settled higher, up 3.2 to 1386.30. Silver futures (/si)for July delivery settled up 0.1820 to 21.9250. Crude futures dropped, as did most energy products.

Monday's Developments

U.S. futures took off to the upside overnight. That occurred despite weak data from China and early signs that Europe wasn't feeling in a particularly celebratory mood.

China's Shanghai Composite was shuttered last night due to a bank holiday. It remains closed tonight, too, but will eventually be reacting to disappointing data released over the weekend. Industrial production grew only 9.2 percent from the year-ago level, less than expected, and factory prices fell 2.9 percent from the previous month, more than expected. May exports grew only 1 percent, questioning the economy's ability to match the projected 7.5 percent GDP for this fiscal year. Exports to the U.S. and European Union countries both fell. Imports, expected to show a 6-percent gain, fell 0.3 percent. Inflation eased to only 2.1 percent against expectations of 2.9 percent.

Other Asian bourses turned in positive performances, perhaps due to economic releases from Japan. In the January-March quarter, the Japanese economy grew an annualized 4.1 percent, far more than the previously expected 3.5 percent. Nominal GDP grew only 0.6 percent for the quarter, however. Consumer confidence, surely measured before the last weeks' meltdown, measured the highest since 2007, a Bloomberg article mentioned. The current-account surplus, at 750 billion yen, was more than double the expected surplus. The Nikkei 225 gained 4.49 percent; the Hang Seng, 0.18 percent, and the Straits Times, 0.50 percent.

European bourses bounced when the U.S. market opened, but most couldn't maintain those bounced-to afternoon highs. The FTSE 100 did the best at maintaining the afternoon highs. The FTSE 100 rose 1.02 percent, and the DAX, 0.64 percent. However, the CAC 40 dropped 0.21 percent. Spain's IBEX 35 fell 0.47 percent, and Italy's FTSE MIB, 0.81 percent.

Monday's U.S. economic calendar was light, with only Moody's weekly Business Confidence Survey. However, Standard and Poor's added to the economic news. The firm raised the U.S. sovereign outlook to a stable outlook from the prior negative one. One immediate impact was a knee-jerk raising of yields, with both the TNX and TYX, ten-year and thirty-year yields, spiking above recently holding resistance levels. They both closed up, although off their day's highs, at 2.215 and 3.37 percent, respectively. Some disputed the idea that S&P's upgrade had anything to do with the treasury yields, mentioning margining changes on swaps that went into effect today.

Moody's weekly Business Confidence Survey dropped after three weeks of gains. The headline number dropped to 28.2 from the prior 29.6. Moody's still characterizes the number as being near the top of its recent range, "consistent with growth at the high end of the economy's potential." Moody's did change one description in its summary. For many weeks, it has been describing both employment and demand for office space as being soft. Now, Moody's lists demand for office space as the only soft spot.

Story stocks must start with Apple (AAPL, 438.89, down 2.92 or 0.66 percent), presenting at the Worldwide Developers Conference. Let's talk about expectations first since expectations always figure high into the reaction to Apple's conferences. Apple enthusiasts wanted to be wowed, while analysts and business writers cautioned that Apple and its products were matured with less opportunity to wow customers.

All those five thousand attendees who snapped up tickets and then lined up to get into today's conference at the Moscone West Center certainly weren't bored with AAPL. While some analysts focused on hopes for more hardware, others said the concentration would be on software, since the software has to precede new hardware developments.

Specifically, conference attendees wanted to hear about Apple's mobile operating system, iOS 7, as well as the Mac OS X operating system, and music streaming service that news services had dubbed iRadio. However, they also wanted to hear about hardware. They expected design changes in the iPhones and iPads, with a flatter, simplified look. Analysts and Apple enthusiasts wanted this morning's keynote speech to introduce something new related to wearable technology. They wanted that new mobile operating system to interconnect with wearable devices such as the much-hyped watch. Some analysts wanted to see longer battery life, too.

There was something that analysts and enthusiasts didn't want to see or hear. They didn't want changes that confused them or disappointed them, as happened when AAPL moved away from Google maps last year.

Investors and momentum traders began expressing their dissatisfaction within the first hour of Cook's presentation. That presentation focused on the operating systems, including the Mac's Mavericks system that will replace those earlier cat-named versions such as the Mountain Lion, Tiger and Panther. That new operating system does promise more integration with other devices such as iPhones and iPads. Multiple screens can be used.

The new iOS 7 mobile operating system will be available this fall. One new feature, AirDrop, allows it to share content between devices.

Other changes or additions in the Apple lineup included the addition of Apple Maps, although it's uncertain how cheered investors will be by that introduction after last year's snafu over maps. Directions may now be sent to the iPhone from the Mac. The browser Safari's improvements were also discussed, including the use of tags and Finder tabs.

Some hardware changes were also revealed early in the session, including a switch to Intel's Haswell processor in the laptops. That processor means that graphics performance is improved and battery life may increase by up to 50 percent. For example, the MacBook Pro Air's battery life is expected to increase from the current five hours to nine hours. Other changes included extra speed, delivered via a new AirPort Extreme, and support of the 802.1ac Wi-Fi network, also faster than the current network. New MacBook Airs are ready to ship today, priced at $999 for the 11-inch version with 128GB flash storage and $1099 for the 13-inch.

Finally, near the end of the presentation, AAPL announced the streaming music service that it is calling iTunes Radio, not iRadio, rolling out the promised and long-awaited service. News was that no subscription would be required, although I have not been able to confirm this. iTunes Radio is to be built into the mobile operating system. Whether this development will overcome competition from Pandora, Spotify, and Google's All Access remains to be seen.

Although one television commentator mentioned that he had been watching everyone entering to see if anyone wore the fabled iWatch, he didn't see any. Neither did the attendees. None was announced.

Investors weren't wowed, apparently. They expressed their disappointment by selling harder after the conference wrapped. In opposition, during the regular session, Pandora (P, 15.49, up 0.37 or 2.45 percent) and Google (GOOG, 890.22, up 10.49 or 1.19 percent) both climbed.

However, GOOG was volatile in after-hours trading. At one point shortly after the close, it had dropped to 885.49, down 4.73 from the regular close when I glanced at it. As this report is edited, has jumped to 890.62, up 0.40 from the close. The original post-close drop came as news circulated that Apple announced would no longer use Google for the default searches on the iPhone and iPad Siri voice assistant. Bing will now be the default source.

3M's (MMM, 110.81, down 0.30 or 0.27 percent) CEO announced that the company will raise the percentage of revenue spent on research and development to six percent from the previous historical five percent. The company has been measuring the percentage of revenue garnered from products that didn't exist even five years ago. It has raised that percentage to 34 percent from the previous 25 percent and wants to reach 40 percent by 2017. The CEO also mentioned struggles with a slower economy and weaker Asia. They don't believe that they will outperform beyond their current estimates, given those challenges.

SAC Capital has not had a good year and it certainly didn't have a good week last week. In an exclusive break, CNBC said that last week's redemption requests measured between $2 and $3 billion. The requests had been expected. As of May, the company held about $14.5 billion in funds, with only about $4 billion of that from outside assets. The other assets belong to founder Steve Cohen and others.

Canadian Solar (CSIQ, 10.16, up 1.3y or 15.45 percent) will construct a plant in Ontario. Samsung Renewable Energy has hired the company to build Grand Renewable Solar, a 130 MW project. The company's gains were made on more than three times the average daily volume.

China's slowdown has impacted McDonald's (MCD, 99.53, up 1.25 or 1.27 percent) sales in that country. Sales in China declined, but overall global same-store sales rose 2.6 percent in May, more than expected.

One company may benefit from increased foreign sales. According to Barron's an African distributor believes that Caterpillar Inc.'s (CAT, 83.80, down 0.85 or 1 percent) equipment sales in Africa could increase by ten percent a year. Apparently, investors weren't impressed. However, the decline was on volume only 70 percent of the average daily volume.

Gilead Sciences (GILD, 52.44, down 0.45 or 0.85 percent) received happy news from the FDA. Its drug, sofosbuvir, intended to treat oral hepatitis-C, has received priority-review status.

China's Shuanghui International may run into a complication with its planned purchase of Smithfield Foods (SFD, 32.75, down 0.07 or 0.21 percent). Today's decline was small, but on more than double the average daily volume. U.S. laws forbidding foreign ownership of farmland may result in the sale of the company being undone, some articles speculate. The law applies to farmlands in at least five Midwest states.

Tesla (TSLA, 100.05, down 1.99 or 1.95 percent) declined today. The decline was pegged on an unfavorable article this weekend.

After the close, Texas Instruments (TXN, 36.62, up 0.44 or 1.22 percent) updated its second quarter outlook and promptly retraced more than the day's gains. It was last at 36.00 or 0.62 lower than the day's close. Without looking at time and sales, however, I can't be certain that the decline came on reasonable volume or represented an errant 100-share order.

The new ranges included an earnings per share outlook of $0.39-0.43 against a prior outlook of $0.37-0.45. The average of the two ranges is the same. Revenue expectations were narrowed to $2.99-3.11 billion from the prior $2.95-3.17 billion. The new $3.05 average is lower than the previous $3.06 average.

Cigna Corp. (69.00, up 0.55 or 0.80 percent) also reaffirmed guidance after the close. The stock was little changed in after-hours trading.

Gap Inc. (GPS, 41.57, down 0.52 or 1.24 percent) reported monthly same-store sales. Those sales rose 11 percent, with same store sales at Gap rising 8 percent and, at Old Navy, 9 percent. Banana Republic's stores open more than a year were unchanged.

Lululemon Athletica Inc. (LULU, 82.28, up 0.85 or 1.04 percent) plunged in after-hours trading. As this report was prepared, it was last at 72.95, down 9.33 from the day's close. The company reported earnings of $0.32 a share on revenue of $345.80 million. Both beat published expectations of $0.30 per share on revenue of $341.40 million. Moreover, expectations for the next quarter were set higher than previously expected. However, the company announced that CEO Christine Day will be leaving. In addition, late news revealed that the company will delist from the Toronto stock market.

Let's look at daily charts. By last Monday, the major indices had set new downside targets, targets that were achieved before the week's end. What targets have they set now?

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:

Today's candle was indicative of indecision, not a sterling endorsement of last week's bounce. Let's look at some guideposts.

As long as the SPX sustains daily closes above a turning-higher red 9-ema, it maintains a potential upside target at about 1650-1670. Potentially strong resistance on daily closes might be found in that target zone, so bulls should be protective of their short-term gains if those levels are approached. If the SPX should make it past that 1650-1670 zone on consistent daily closes, bulls should remain aware of the potential for double-top action marked by resistance at or near the recent 1687.18 high. It's not until the SPX powers past that zone on consistent daily closes that we know that the prior rally pattern has fully reasserted itself.

Prices that chop across a flattening 9-ema would alert bulls and bears of trendless action in which neither the bulls or bears prevail. The breakout could be in either direction if that kind of action occurs.

Consistent daily closes below a turning-lower red 9-ema signal that last week's lows could be retested, with potential support on daily closes extending from about 1595-1615. Failure to maintain daily closes above last week's 1598.23 low or perhaps even more than a few hours spent below that low may signal that the SPX is vulnerable to a test of the next potential downside target. That ranges from about 1550-1570.

Annotated Daily Chart of the Dow:

The Dow also produced a daily candle indicative of indecision. It did so at the bottom of a potential resistance zone.

Last week, the Dow fell to its potential downside target, where it found support and bounced. Now, sustained daily closes above a turning-higher red 9-ema target the 15320-15450 zone, where potential resistance on daily closes may be found. The Dow approached the bottom of that zone today. Bulls should be protective of their short-term gains in this zone but especially if 15400-15450 is approached. Daily closes above that potential resistance still might be vulnerable to double-top action near the recent high of 15542.40. It's not until the Dow sustains daily closes above that recent high that we know for sure that the Dow has reasserted its former rally pattern.

Daily closes that chop back and forth across a flattening red 9-ema tell us that no pattern is in play. Bulls and bears are evenly matched. The next breakout could be to the downside as well as to the upside.

Sustained daily closes below a turning-lower red 9-ema suggest that next support could be retested. That support lies anywhere from about 14840-15000. A failure to sustain daily closes above last week's 14844.22 low or perhaps even more than a few hours spent below that level make the Dow vulnerable to a deeper drop, to the area of the marked red rectangle.

Annotated Daily Chart of the NDX:

The NDX also produced a small-bodied candle today.

The NDX also fell to its downside target last week. Like the other indices, it found support there and bounced. Sustained daily closes above a turning-higher red 9-ema set a potential upside target near 3010-3065, with especially strong potential resistance from about 3020-3040. Short-term bulls should be protective of gains in that zone if it is approached. However, it's not until the NDX sustains daily closes above about 3065 that that we know that resistance has been breached and the risk of a double-top formation rendered less likely.

Daily closes that chop back and forth across a flattening red 9-ema signal that bulls and bears are equally matched. The next breakout could be to the downside as well as to the upside. With the NDX, it's sometimes a good thing to have a recognizable sign that what looks like a trend might not be a trustworthy trend.

Daily closes below a turning-lower red 9-ema signal a higher possibility that the NDX might retest its nearest support zone on this chart, now at about 2900-2950, with strongest support on daily closes appearing to be from about 2908-2935. A failure to sustain daily closes above last week's 2911.94 low or perhaps even more than a few hours spent below that level signal vulnerability to a test of next lower potential support, found from about 2825-2860. The Keltner channels suggest 2825-2840 as a potential target, but we should give homage to the potential support of an April swing high that produced several daily closes near 2860.

Annotated Daily Chart of the RUT:

The RUT's daily candle was a little sturdier than that seen on other daily chart, but it was also a small-bodied candle. With the spring off the day's low and the close very nearly at the day's high, I would not go so far as to say it was indicative of indecision, but it did not vault high enough to give us more of a clue.

The RUT succumbed to its downside target last week and also bounced from that target. Sustained daily closes above a turning-higher red 9-ema maintain a potential daily target from about 1000-1004. That may be a zone of potentially strong resistance on daily closes, so short-term bullish gains should be protected in that zone. Resistance on daily closes also might be found at or near the recent 1008.23 intraday high. It's not until the RUT sustains daily closes above that high that we know that its former rally pattern has reasserted itself.

Daily closes that chop back and forth across a flattening red 9-ema signal that no trend is in place. Bulls and bears are equally matched. The next breakout could as easily be to the downside as it could to the upside.

If the RUT sustains daily closes below a turning-lower red 9-ema, it is vulnerable to a retest of potential support now grouped from about 953-968, but looking strongest from about 960-963. Sustained daily closes beneath 953 target the next potential support zone, marked by the next lower red rectangle on the chart.

Annotated Daily Chart of the Dow Jones Transports:

The $DJT can be used as an indicator or canary-in-the-mine indicator. It tends to move big and sometimes move early, signaling changes in the economy or at least the outlook for the economy. Today it spun its wheels.

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:

This morning, the SPX charged up to test Keltner resistance at the top of the middle-sized purple Keltner channel. These channels are somewhat analogous to the more familiar Bollinger bands. The charge higher pushed the channel's boundaries higher, too, but resistance on 30-minute closes mostly held. The SPX needs to maintain 30-minute closes above about 1650 before we can consider it breaking free of this resistance. If that breakout happens and is sustained through the early morning noise tomorrow, a potential upside target of about 1660-1680 is set.

Between about 1635-1650 is a noisy section, with action chopping within that zone not telling the short-term trader all that much. Sustained 30-minute closes below 1335, however, set a tentative next downside target from about 1617-1622. An additional downside target is marked in case that one doesn't hold.

Annotated 30-Minute Chart of the Dow:

Like the SPX, the Dow charged up to test next potential Keltner resistance this morning, configured just like the SPX's. Also like the SPX, the Dow's action pushed that Keltner resistance higher, but the Dow could not manage consistent 30-minute closes above that resistance. It held. The Dow needs to sustain 30-minute closes above about 15315 before we can consider it breaking free of that resistance. If such action occurs, the next tentative upside target is set at about 15475-15525.

Between about 15170-15315 is a noisy zone. Chop between those levels doesn't tell the short-term trader much about next direction. However, sustained 30-minute closes below about 15170 set up the next potential downside target, at about 15035-15075. Failure to hold that support on 30-minute closes suggests a trip back down to Thursday's low.

Annotated 30-Minute Chart of the NDX:

The NDX's setup and behavior proved similar to that seen on other indices. The NDX tested and pushed higher its Keltner resistance but could not maintain 30-minute closes above it. Resistance held. It's not until the NDX can maintain 30-minute closes above about 3007-3008 that we can believe it's breaking free of that resistance. If that action should occur, then it sets a tentative next upside target near 3041-3052.

Movements between about 2975 and 3008 constitute chop and don't provide much information to the short-term trader. A failure to maintain support on 30-minute closes near 2975 sets a new potential downside target, from about 2945-2955. A failure to hold support there on 30-minute closes would suggest that last Thursday's low could be tested.

Annotated 30-Minute Chart of the Russell 2000:

Like the other indices, the RUT shoved against the next potential Keltner resistance all day without being able to sustain 30-minute closes above it. Resistance held, although viewing this chart lends the impression that if the close had been thirty minutes later, there might have been another outcome. The RUT needs to sustain 30-minute closes at least above 993 and probably above Tuesday's 994.56 high before short-term traders can feel somewhat reassured that resistance has been breached. If that should occur after the early morning noise, then the next potential upside target is set near 1003-1008.23, with the higher number representing the recent high, of course.

Between about 982.50 and 994.56, the RUT is in a noisy chop zone, without too much information about what happens next. If the RUT should drop below about 982.50 and maintain 30-minute closes below that level, it sets a new potential downside target from about 975-978. Failure to maintain 30-minute closes at or above that support would target last Thursday's low.

What do I think? Candles on most of these daily chart show indecision. Moreover, if I had drawn price channels circumscribing the pullbacks off the May highs, we would see that indices were pausing at the top of those channels, prepared for either a breakout or another pullback through those descending price channels. Volume was so light that we saw not only indecision but an unwillingness to put more money into the market until someone, somewhere makes a decision.

From where I stand, a rush up to retest recent highs is about as likely as a downturn to test last Thursday's lows. And vice versa. Prepare your trades to withstand either development.