Market Internals

Introduction

Global equity bourses turned lower Sunday night. Bonds tumbled with yields spiking. Our futures sank, too, with the near certainty of another volatile day on the markets. The U.S. contributed worries about a disorderly unwinding of the quantitative easing program. China added heightened concerns about slowing demand and banks' funding of speculative investments. Europe's financial ministers had spent the weekend haggling over whether a Cyprus-like "bail-in" could be imposed on taxpayers and large depositors in the case of future Eurozone bank failures.

Volatility did reign in equities, commodities and, especially bonds. Along the way, a Fed governor likened big-money market participants to feral hogs feeding off any perceived weakness or bad scent, referring to the reaction to last week's FOMC statement and post-decision interview. Those feral hogs went to town today, didn't they, both to the downside and upside. That statement might not have charmed market participants although most probably understood that he wasn't labeling us mom and pop investor. We're just trying to figure out what will happen next. I don't know whether to be more miffed that he might have been calling me a feral hog or that I'm not monied enough to be included, so I've elected to just think of it as an injudicious statement.

The SPX dropped 1.21 percent; the Dow, 0.94 percent; and the NDX, 1.03 percent. The RUT fell 1.31 percent, and the SOX, 2.02 percent. The transports, the DJT, dropped 1.96 percent. Financials as represented by the BKX tumbled 1.60 percent. Retailers as represented by the RLX fell 0.95 percent, and the Dow Jones Home Construction Index slipped lower by 0.87 percent. The volatility indices all popped, but they didn't close above their 12/28/12 closing levels.

Bond yields jumped but ended the day well off their day's highs. The ten-year (TNX) jumped to 2.657 percent this morning, but ended the day at 2.548. If my eyeballing of the chart can be trusted, that's the highest yield since August, 2011. Yields on the thirty-year (TYX) jumped to 3.63 this morning, but ended the day at 3.559, the highest value since late August/early September 2011.

Crude futures settled at 95.18/barrel, up 1.49 or 1.59 percent. Gold futures (/GC) for July delivery settled at 1276.80, down 14.9. Silver futures (/SI) for July delivery settled at 19.493, down 0.466. Copper futures for July delivery settled at 3.0245, down 0.0710.

Monday's Developments

Asian bourses turned lower last night. The Nikkei 225 dropped 1.26 percent; the Hang Seng, 2.22 percent, and the Straits Times, 1.60 percent. China's Shanghai Composite dropped a hefty 5.29 percent amid worries about slowing demand and overextended credit. Goldman Sachs has lowered its estimate for China's GDP growth from its prior 7.8 percent to 7.4 percent. Last night's Shanghai Composite close of 1963.24 represents a 19.36 percent drop off the February 6 close of 2434.477.

Britain's Chancellor George Osborne warned yesterday that the U.K. must continue austerity measures or risk another crisis. His warning came before Wednesday's planned revelation of spending limits for 2015-2016 and on the heels on a meeting of European financial leaders that failed to resolve issues related to who pays for bank failures. At discussion among Europe's financial ministers was whether large depositors can be bailed in, as they were in Cyprus. Understandably, that's a proposal that alarms everyone with money deposited in banks, even those of us not moneyed enough to be feral hogs.

France, Britain and Sweden want to spare taxpayers or large depositors at failed banks, but Germany's primary focus was on building strict procedures that would be followed by all countries in the case of a failed bank. Financial ministers exiting the meetings said that agreement was still possible at this week's ECOFIN meetings on Wednesday. We can all remember how markets reacted to the Cyprus solution when that solution was supposedly being applied in only a single situation. Having that bail-in solution applied across a broader swath of countries will certainly frighten depositors.

European bourses closed sharply lower. The FTSE 100 dropped 2.12 percent; the DAX, 1.24 percent; and the CAC 40, 1.71 percent. Spain's IBEX 25 fell 1.91 percent, and Italy's FTSE MIB, 0.93 percent.

The May Chicago Fed National Activity Index (CFNAI) led off the U.S. economic reports this morning. May's CFNAI was -30.00, lower than the consensus -0.25 and at the bottom of a consensus range of -0.30 to -0.10. April's index had measured -0.53 but was revised slightly higher to -0.52, so May's report was an improvement. The Chicago Fed characterized May's report as showing slight improvement, with the improvement pegged on production-related indicators.

Despite this month's improvement, the three-month moving average fell to -0.43 from its prior -0.13. This is the third month in a row that the three-month average dipped into negative territory. That average led the Chicago Fed to say that "growth in national economic activity was below its historical trend." Inflationary pressures were subdued, the Chicago Fed also said.

The particulars? Only 33 of the 85 indicators that comprise this report made positive contributions to May's CFNAI. Fifty-two made negative contributions. The wait-a-minute, let's-take-a-breath observation? Since 2010, the CFNAI has been chopping back and forth across that 0.0 above- or below-trend benchmark in a rather tight range from about -0.7 to +0.7. Back in January, 2013, for example, the three-month average measured -0.55. In February, the next month, it jumped to +0.61. While this month's average was -0.43, it certainly stayed within that choppy range.

June's Texas Manufacturing Outlook might not be as closely watched as the Chicago Fed's CFNAI, but Texas painted a sunny patch on what had been a gloomy day. May's number had measured -10.5, and the consensus for June was a return to the flat-line level at 0.0. Although May's business conditions had been negative, the Dallas Fed had said that the detail in the report hinted at a return to positive growth.

The headline number for June jumped to 6.5. The production component leaped up to 17.1 in what the Dallas Fed characterized as the strongest reading in more than two years. Results revealed strength in new orders, capacity utilization and shipments. The company outlook component surged up 20 points to 13.3. Moreover, while the employment index was zero, the hours worked index climbed into positive territory again. Companies still aren't able to push higher raw materials costs or increased wage and benefits costs onto consumers but future expectations indices surged higher.

In between those two reports, Moody's reported its weekly Business Confidence Survey. After two consecutive weeks of declines, the Business Confidence Survey gained, climbing from last week's 28.5 back to 29.4. Like the CFNAI, however, this index has been chopping back and forth in a narrow range, and it stayed within that range.

Dallas Fed Richard Fisher spoke in the afternoon and his speech was much anticipated. However, before that, two other Fed governors weighed in. Neither Fisher nor one other of today's commenters is a voting official this year, but that apparently doesn't matter in this environment.

New York Fed President William Dudley spoke in Switzerland about the need for financial stability before monetary police can work. Although this Fed governor did vote in favor of the statement issued last week, he's characterized as being dovish. He believes that, in hindsight, the federal policy was not accommodative enough. He favors stopping buying bonds only when the unemployment rate falls to 7 percent.

Non-voting Minneapolis Fed President Narayana Kocherlakota also made a statement today. He denied that last week's statement represented a more hawkish FOMC.

As Jim Brown mentioned this weekend, Dallas Fed President Richard Fisher has been in favor of ending QE. He admitted today that the FOMC anticipated that markets would react significantly to their statement. He felt that markets had overreacted. He might not have soothed the feelings of big-money market participants, however, when he likened them to "feral hogs" going after a perceived weakness or "bad scent." His published statements did not sound too conciliatory to me, but markets appeared to interpret them that way. His and other statements appeared supportive of the bounce off the day's low. Perhaps it was just time for a bounce. Charts shown later will reveal that significant potential support was being tested at today's lows on the SPX, Dow, NDX and $DJT.

The Bank for International Settlements weighed in this weekend on this discussion of central bank policies, too. Jaime Caruana, General Manager of the BIS, made a statement in Basel yesterday. Print news article characterized the bank as warning central banks to ease away from bond purchases. Such purchases cannot produce a global economic recovery, Caruana's statement made clear. In what he called an "overdependence on central banks," Caruana warned that "the bigger the scale and scope of their interventions, the more difficult it will be to reduce them." He advised that the bank was not calling for "undifferentiated, simultaneous and comprehensive tightening." The bank, however, wants central banks to act responsibly, realizing that monetary policy has done its part and other dynamics and "a different policy mix" must prevail now.

Story stocks today included companies involved in mergers or acquisitions. Vodafone (VOD, 27.31, up 0.04 or 0.16 percent) made a takeover offer to Kabel Deutschland Holding AG's shareholders. The offer includes an 87-euro/share cash offer to the shareholders.

In other M&A news, Tenet Healthcare (THC, 43.73, up 1.88 or 4.49 percent) announced that it would acquire competitor Vanguard Health Systems (VHS, 20.70, up 8.33 or 67.34 percent) in a $4.3 billion deal. Shareholders would receive $21.00/share, well above the VHS $12.37 Friday close. THC will also assume $2.5 billion in debt but will be able to enter new geographic markets and widen the breadth of service offerings, THC's CEO Trevor Fetter said. Fetter said that the acquisition will help the company realize increased benefits under healthcare reform.

This morning, NRG Energy (NRG, 25.94, up 0.52 or 2.05 percent) raised guidance for 2014's free cash flow and adjusted EBITDA as well as 2013's free cash flow. 2013's Adjusted EBITDA was reaffirmed. The previous guidance had been issued on May 7 during NRG's first quarter earnings presentation. The company pointed to "improved synergies resulting from the GenOn combination" as well as market conditions as leading to the raised guidance.

Biopharm company Vivus (VVUS, 13.02, down 0.82 or 5.92 percent) suffered due to rancor on the company board. First Manhattan Co. wants shareholders to replace the current board with a new lineup they prefer.

Jim Brown mentioned in the weekend Wrap that Oracle (ORCL, 30.17, up 0.03 or 0.12 percent) had promised a "startling series of announcements" due this week. Analysts speculated that the announcement would be a cloud distribution agreement with Microsoft (MSFT, 33.72, up 0.45 or 1.35 percent) and others. That partnership was unveiled this afternoon. Oracle's software will run on MSFT's Windows Azure cloud infrastructure and Windows Server Hyper-V. MSFT will offer Java and Oracle Database to Windows Azure customers.

The Nikkei newsletter announced that Microsoft (MSFT) will offer games for Apple's (AAPL, 402.54, down 10.96 or 2.65 percent) iPhone and other competing smartphones. The website said that this offer will be made via a partnership "with a Japanese firm."

Late-breaking news was that the European Commission has approved IntercontinentalExchange's (ICE, 171.94, down 0.62 or 36 percent) acquisition of NYSE Euronext (NYX, 40.38, down 0.05 or 0.12 percent). Approval by the SEC and the College of Regulators is still required, but today's approval was significant.

In other late-breaking news, Senators Bob Corker (R) and Mark Warner (D) are said to be ready to introduce a bill tomorrow that would wind down Fannie Mae (FNMA, 1.80, down 0.05 or 2.70 percent) and Freddie Mac (FMCC, 1.72, down 0.02 or 1.15 percent) in five years. Private equity would take the hit for the first 10 percent loss on all new mortgage-backed equities under the terms of the bill, said a CNBC report. Equity holders in those firms are said to be out of luck, as not much would be left to be distributed to them.

Let's look at daily charts. Indices dropped hard this morning, falling low enough to meet next downside Keltner targets on most indices. The RUT was one exception. It, too, dropped hard but not hard enough to drop into the analogous Keltner downside target before it bounced along with other indices.

Charts

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

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

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

Annotated Daily Chart of the SPX:

The SPX dropped hard enough to meet its nearest downside target and test the support at that zone. The potential Keltner support on daily closes just above 1560 was tested today, with further potential support now extending down toward 1540, where the SPX so often found support on downdrafts during the spring.

Failure to maintain daily closes above 1560 suggests a test of the 1540 support, at least. On a Keltner basis, sustained daily closes below about 1560 set the stage for an eventual decline toward 1450-1470. While I would evaluate my trading and adjustment plan in case such a decline should occur, I would also not rule out the possibility of 1540 stopping any further declines at least long enough to chop out a consolidation zone.

Now that today provided a thorough test of the Keltner support grouped just above 1560 and then prices bounced, the upside targets must be considered, too. The first upside target on the daily chart now would be potential resistance grouped from about 1608-1628. That would bring the SPX up into a test of the red 9-ema. Because the SPX dropped out of a consolidation pattern, we must now consider the possibility that such a bounce could be met with selling. This 1608-1628 zone would be a strong possibility for a stall and such selling.

However, bears should be aware that indices sometimes act differently when in decline. Relief rallies can be rabid because both bears and bulls must participate. Bears must buy to cover, too, when their positions get into trouble, and they sometimes feed a rally. Although not a given, it's possible in a relief rally that prices could zoom all the way through its smallest (grey) Keltner channel. That would bring the SPX all the way up into a retest of the 1640-1655 zone, testing potential resistance there. Sustained daily closes above that level suggest that it's less likely that the SPX is in a sustained downtrend. Until closes are sustained above that zone, even a jump up to that level is consistent with what we know can happen with a relief rally. Bulls should remain cautious and protective of any short-term gains.

Annotated Daily Chart of the Dow:

The Dow also dropped all the way to the next Keltner target, finding support there and bouncing. Sustained daily closes beneath about 14530 would set up the next potential downside Keltner target, now extending from about 13540-13730. However, we have to extend nearest potential support to historical support from 14390-14450, lower than the Keltner zone tested today. Dips into that historical support zone could be met with buying, at least long enough for some churn. Trading between 14390-14530 will be fraught with danger, however, as daily closes below about 14530 will have technically set that next potential Keltner downside target.

With today's thorough testing of support near 14530 and bounce from that zone, it's possible that a relief rally could happen next. Sustained daily closes above 14530 suggest a next upside target near the red 9-ema, with the potential resistance extending from about 14860-15030. Relief rallies, however, are more likely to zoom from one boundary to the opposite boundary of the grey Keltner channel although it's not a given that they will. Even a climb up toward 15200-15330 would be consistent with a relief rally as long as the climb is stopped on daily closes at that upper boundary. Sustained closes above about 15330 suggest that something stronger than a relief rally is occurring, however.

Annotated Daily Chart of the NDX:

The NDX also dropped into a thorough test of the potential Keltner support. It did so Friday, producing a strong bounce off the upper edge of that support. Today, it dropped further into the support and only then bounced again.

That bounce came just in time. Sustained daily closes below about 2820 would set up the possibility of an eventual dip to 2625, at least on a Keltner chart basis. NDX traders should, however, be aware of the potentially strong historical support and resistance that had gathered just either side of 2800 through the spring. It's possible that zone near 2800 could stop any declines at least long enough for another congestion zone to form near that level.

Sustained daily closes above about 2860 suggest stronger potential for a relief rally. As was true of the other indices, the fact that the NDX dropped out of a congestion zone suggest that traders should be watchful of rollover potential on bounces. Strong resistance on daily closes might be found from about 2905-2948, with the red 9-ema also within that zone.

On dips in a rallying market, we often don't expect prices to dip further than the red 9-ema, at least on daily closes. On relief rallies, however, we must prepare for the possibility that prices will zoom all the way from one grey channel boundary to the opposite boundary of that channel. That means that the NDX could rally all the way up to 2975-3010 and the rally still be only a relief rally that eventually fails. Sustained daily closes higher than about 3010 suggest that something stronger than a relief rally may be occurring, however.

Annotated Daily Chart of the RUT:

After studying the previous three charts, it's easy to see that the RUT outperformed the other indices on a Keltner basis. Its drop was sharp today, too, but the RUT did not as closely approach the next Keltner support zone. Does that mean the RUT still has a distance to decline or does it signal something else about the underlying market behavior?

Bears should always be aware that the RUT could be serving as a kind of contrarian indicator. It should be leading the way to the downside, and it's not. However, when we next look at another index that often leads, the $DJT, we see that it indeed did lead or at least accompany other indices in their downside Keltner support tests. I'm not sure what to make of the RUT's outperformance on this daily chart.

Sustained daily closes below the next support level from about 925-940 would set the next potential eventual downside target, near 860. However, we should be aware of round-number and historical support near 900. While I have seen Keltner targets work too often to discount them, it's possible that support near 900 would provide support at least long enough to churn out a consolidation zone.

A relief rally could come at any time. A first potential upside target might be the zone extending from about 968-982, with the red 9-ema inside that zone and lending potential resistance on daily closes. Short-term bulls should know how they'll protect their profits if that zone should be tested.

As was true with the other indices, relief rallies can be rabid and can zoom from one side of the grey Keltner channel all the way to the other. That would bring the RUT up toward 990-1003. It's not until the RUT can sustain daily closes above about 1003 that we know something other than a relief rally is occurring.

Annotated Daily Chart of the Dow Jones Transports:

The $DJT is not optionable, so we don't trade it. However, it's a good indicator index because it tells us something about the underlying economy. While the RUT outperformed on a Keltner basis, the $DJT did not. Like the NDX, it threatened the lower boundary of the potential support zone it was testing. Its rebound off the low did not look as strong as the RUT's, either. Watch the $DJT to gain insight into or at least corroboration of the next direction.

Tomorrow's Economic and Earnings Releases

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

What about Tomorrow?

The big market moves have sliced through support zones all the way up through the 30-minute charts. We'll be looking at 60-minute charts to get the best overview of what might be happening even over the short term.

Annotated 60-Minute Chart of the SPX:

By Friday, the SPX had dropped all the way through the Keltner channels to test lower potential Keltner support on 60-minute closes. That support held on Friday. However, the test pushed the channel boundary lower, and it did not hold when tested this morning. By the afternoon, the SPX had scrambled back above that boundary, rising into a red 9-ema test.

Resistance did hold this afternoon on 60-minute closes. That renders it just as likely that the SPX will drop into a retest of today's lows as it is that it will climb into the next potential resistance zone near 1592-1608 marked. There is danger that the SPX could slide along a declining channel support if it drops again.

Annotated 60-Minute Chart of the Dow:

Like the SPX, the Dow first tested the widest Keltner channel's lower boundary on Friday. Sixty-minute closes held above that level on Friday but the decline pushed the channel boundary lower, weakening its potential support. Today, that support did not hold through the morning's test, and it wasn't until the afternoon that the Dow pushed back above that boundary and up into a red 9-ema test. Although the narrower Dow was pushed above the red 9-ema and other resistance, it could not sustain 60-minute closes above it. The resistance held. That renders it just as likely and maybe slightly more likely that the Dow will drop into a retest of today's low as it is that it will climb to test the potential resistance zone from about 14830-14925.

Annotated 60-Minute Chart of the NDX:

The NDX also hit the lower Keltner channel boundary Friday, pushing support lower. The NDX overran that boundary Friday, pushing the boundary line lower before scrambling back above it. Today, the violation was more severe, but the NDX managed an afternoon bounce with the other indices. The NDX bounced up to test a Keltner resistance band that stretched from about 2855-2885. That resistance held on 60-minute closes. That result renders it just as possible that the NDX will be knocked back into a retest of today's low as it is that it will climb through this resistance zone and into the next potential target near 2907-2924, marked on the chart by the green rectangle.

Annotated 60-Minute Chart of the Russell 2000:

If the RUT outperformed other indices on the daily charts, it did not on the 60-minute chart. Like the other indices, it tested the lower Keltner channel boundary Friday, pushed it lower, and then violated it this morning. The RUT bounced along with the other indices and found resistance on 60-minute closes at the same Keltner configuration that stopped the other indices. The RUT is just as likely to drop into a retest of today's low as it is to climb through this resistance level and test the next upside target from about 962-970.

Despite the major indices leaving lower shadows or candle wicks on daily charts as they bounced off their lows, most indices stalled this afternoon at their first important resistance tests on the 60-minute charts. While I would like to have confidence that the springs off the day's lows, made visible by those lower candle shadows, would lead into a relief bounce tomorrow, the 60-minute chart argue against too much confidence. Those charts suggest indices could just as easily retest today's lows as bounce further. If the indices decline tomorrow morning, those who want some stabilization would like to see 60-minute closes at or above today's low. Whatever happens first thing tomorrow morning, know that thirty minutes after the open, two important reports could reverse the first move of the day or accelerate it. Prepare accordingly.