Market Internals

Introduction

After a weekend of protests in Egypt, the military has warned President Mohamed Mursi that he and other politicians have 48 hours to devise a plan that will satisfy the demands of the people. If he and other politicians can't devise an acceptable plan during that period, the armed forces will do so. Speaking for the military, chief-of-staff General Abdel Fattah al-Sisi said the military has no intentions of involving itself in politics or government, but only wants to insure the "participation of all factions and national parties, including young people."

Neither did a Deutsche Bank prediction discourage U.S. market participants. That prediction was that the SPX would bottom out above 1525 sometime in mid-July. Deutsche Bank believes that the current quarter won't be strong enough to settle concerns about the U.S. economy. Market participants could counter that prediction with others that the SPX was going to zoom higher in the same time period.

The SPX gained 0.54 percent; the Dow, 0.44 percent; and the NDX, 0.61 percent. The RUT rose 1.26 percent, but the SOX dropped 0.15 percent. Volatility indices were lower but well off their lows of the days. The BKX, the KBW Bank Index, rose 0.90 percent. The defensive utilities, as represented by the $DJU, dropped 1.29 percent.

Despite the equity gains, bonds gained, with that combination not the normal relationship. Yields dropped, of course. Yields on the ten-year bond closed at 2.490 percent, and on the thirty-year, at 3.489 percent.

Metals bounced. JP Morgan revealed that it was overweighting commodities. Some experts pointed to that pronouncement as one reason for the gains. Others thought that the gains were short-covering mixed with some actual buying. The U.S. Commodity Futures Trading Commission's data had recently shown that commodities traders had reduced their net-long positions by 20 percent and added to their short contracts by 5 percent. Many firms cut their year-end forecasts for gold last week. Any bounce was likely going to cause shorts to cover. Gold futures (/GC) for July delivery settled at 1255.9, up 32.1. Copper futures (/HG) for July delivery settled at 3.1550, up 0.1045. Silver futures (/SI) for July delivery settled at 19.560, up 0.109.

The big news in the energy trade was the tightening of the WTI-Brent spread to $4.77 a barrel. This is the smallest the spread has been for about two and a half years, the first time it's been less than $5.00 since the middle of January, 2011. Experts point to the employment of rail links and improved pipeline networks, reducing the bottleneck at Cushing. Crude futures (/cl) for August delivery settled at 97.99, up 1.43.

Monday's Developments

Overnight, China's official June Manufacturing PMI slipped to 50.1, barely managing a number above the 50.0 benchmark. That was the lowest number in four months, appearing as worry about China's economy escalates. New export orders, backlogs of orders, stocks of finished goods, imports, input prices, and many more categories contracted. The PMI, output, and new orders remained above 50.0, but were lower than in the previous month. Pundits peg these declines over the last months on a change in policy from China's new leaders, in office now for three months. Government policy appears to be swinging away from an emphasis on growth at all costs.

Markit and HSBC conduct a private PMI survey, however, and theirs for China measured 48.2, well into contraction territory. That was the lowest number in nine months.

In Japan, however, the numbers were more optimistic. The important Tankan survey showed manufacturers turned positive, with the headline number rising to +4 for the current quarter. This headline number jumped from the previous -8. Japan's new policy, in contrast to China's, aggressively targets growth. The Tankan survey revealed that manufacturers planned to increase capital spending this year. The responding period for this survey was May 28 to June 28. Presumably at least some of the survey responses were collected while the Nikkei was still tumbling lower in its decline from the May 22 closing high of 15627.26 to the June 13 closing low of 12445.38. That improvement in sentiment under those conditions surprises me.

The Nikkei 225 gained 1.28 percent, but the Straits Times lost 0.30 percent. The Hang Seng appeared to have been closed. China's Shanghai Composite climbed 0.81 percent.

The June Eurozone PMI remained in contraction territory, but inched a little above its 48.7 expectation to 48.8. However, the May jobless rate for the 17 countries making up the Eurozone rose to 12.1 from a revised-lower 12.0 percent for April. For the 27 countries that made up the European Union (until today, when Croatia was added), unemployment remained steady.

Ahead of Thursday's ECB meeting, European bourses gained. The FTSE 100 rose 1.03 percent; the DAX, 0.31 percent; and the CAC 40, 0.76 percent. Spain's IBEX 35 gained 1.86 percent, and Italy's FTSE MIB, 1.45 percent.

The first U.S. economic release of the day came from Markit, providing the firm's final Manufacturing PMI just ahead of the ISM's release of its manufacturing PMI. The Markit PMI measured 51.9, lower than either the prior 52.2 or the expected 52.4.

Today's economic calendar turned the 10:00 am release slot into a busy time. The most important release during this time period was the June ISM Manufacturing PMI. The prior number had been 49.00, but the current consensus was for a move back above the 50 benchmark, to 50.5. The number beat expectations by rising to 50.9.

Looking underneath the headline number produced some difficulties in interpreting the results. Employment dropped below 50.0, to 48.7 and into contraction territory. Backlog of orders also contracted, dropping to 46.5 from the prior 48.0. Balanced against those negatives were new orders and production, both rising from contraction territory into expansion territory. They were 51.9 and 53.4, respectively. Inventories inched up to 50.5 from the prior 49.0. Imports and exports both grew. Some of those results look hopeful, but employment remains an important and necessary component of any recovery. Industries in contraction were textile mills, transportation equipment, chemical products, and computer and electronic products.

The ISM Manufacturing Prices also beat expectations for 50.5, rising instead to 52.5 from the prior 49.5.

The Census Bureau reported that May's Construction Spending increased by 0.5 percent. The prior report had risen a revised-lower 0.1 percent, and experts had predicted a rise of 0.6 percent for this report. As with the ISM Manufacturing PMI, looking beneath the numbers revealed some shaky spots in the recovery, but it should be acknowledged that construction spending rose to its highest level in almost four years.

The jump was driven by a sharp rise in spending on federal government projects, with that spending rising 0.6 percent, and state and local spending, rising 1.9 percent. Residential construction spending rose 1.2 percent, and reached a level not seen since late 2008. However, much of that spending was targeted for renovations, with that type of spending not increasing GDP. In addition, spending on private projects did not keep pace with public spending, remaining flat, and spending on private nonresidential structures fell 1.4 percent.

Moody's weekly Business Confidence Survey saw confidence drop to 26.4 from the prior 29.4. The four-week moving average dropped below the 28 support, to its lowest level since early March. Yet Moody's analysis of the number was remarkably similar to what we've seen over the last months: stable business confidence, sturdy sales and pricing, hiring the only soft spot. This number can churn back and forth, but unless it climbs back above 28 soon, that looks like a break of support to me.

Today's story stocks could begin with a story that's been long-awaited. Is Apple (AAPL, 409.22, up 12.69 or 3.20 percent) finally going to release the iWatch? A Japanese patent official said that the company had applied for a trademark for the name "iWatch." AAPL has also reportedly signed a chip deal with TSM.

Intel (INTC, 23.89, down 0.34 or 1.42 percent) reportedly dropped on speculation that Samsung would not extensively use Intel's processor in tablets and smartphones.

Another story breaking well before the open this morning involved thirteen banks, Markit and the International Swaps and Derivatives Association (ISDA). The European Union believes these institutions have "acted collectively to shut out exchanges from the market." The EU is charging them with breaking EU antitrust rules. Named banks included Bank of America, Barclays, Bear Stearns, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, RBS, and UBS. A quick search of charts this afternoon showed a few of these to be up on the day, but most pulled back from morning highs and closed lower for the day.

Another story involved Tribune. Six months after emerging from bankruptcy, the company wants to expand. The company will purchase 19 stations from Local TV in a deal worth more than $2.7 billion. After completion of the deal, Tribune, already the largest operator of broadcast TV stations, will own 42 stations.

Rumors circulated that Time Warner Cable (TWC, 110.95, down 1.53 or 1.36 percent) might be interested in buying Cox Cable and Cablevision (CVC, 18.44, up 1.62 or 9.63 percent). Meanwhile, Liberty Media (LMCA, 127.67, up 0.91 or 0.72 percent) has reportedly been interested in buying TWC, but TWC doesn't return the interest.

News Corp's (NWSA, 14.79, up 3.35 or 29.31 percent) spinoff, 21st Century FOX (FOXA, 29.40) began trading today after the split.

The Nokia Siemens network will soon be a wholly owned subsidiary of Nokia (NOK, 3.86, up 0.12 or 3.21 percent). NOK will pay Siemens (SI, 103.92, up 2.61 or 2.58 percent) 1.7 billion euros for its half of the Nokia Siemens network. This is reportedly less than was expected for the deal.

Onyx Pharmaceuticals (ONXX, 131.33, up 44.51 or 51.27 percent) said "No, thanks" to Amgen's (AMGN, 97.49, down 1.17 or 1.19) unsolicited $10 billion takeover bid, although the company is ready to accept other offers. The manufacturer of cancer drugs wants a higher offer. Did you ever chase a stock or option price higher and just wish you hadn't been too cute with the price when you put in the first offer? I bet AMGN is feeling that way after today's pop in price.

CoreLogic (CLGX, 25.05, up 1.88 or 8.11 percent) said today that it will buy two units from Decision Insight Information Group: MSB and DataQuick. The $661 million purchase will enhance its data and analytics business and expand its property data.

Lower gold prices and challenging market conditions prompted Barrick Gold (ABX, 15.25, down 0.49 or 3.11 percent) to re-sequence the process plant and other facilities in Argentina. They plan first production for the middle of 2016 rather than the prior date in the second half of 2014. As part of this process, they will reduce staff and capital expenditures.

Best Buy (BBY, 29.74, up 2.41 or 8.82 percent) reportedly benefitted from a Credit Suisse analyst's outlook. That analyst raised the price target and resumed coverage of the stock.

Carl Icahn asked to meet with Dell's (Dell, 13.31, down 0.01 or 0.11 percent) special board committee. He's secured a promised $1.6 billion from Jefferies Finance LLC, with his loan commitments now totaling $5.2 billion. He says he can now show that he and Southeaster Asset Management's $14.00/share bid for the company is backed by adequate debt financing. The special board has so far recommended Michael Dell and Silver Lake's $13.65/share offer.

I don't typically cover small-priced stocks on these pages, but all the news services are headlining Zynga (ZNGA, up 0.29 or 10.43 percent) new executive lineup, so I thought it might be amiss if I didn't mention it. Microsoft's Don Mattrick, until now head of Microsoft's Xbox business, will be replacing ZNGA's CEO. The stock was last at 3.26, up 0.19 from the day's close.

Let's look at daily charts. After finding support last week, indices have pushed higher.

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 bounced last week from Keltner and other support. Although it had paused Friday at the next upside resistance, today it jumped above that resistance. Unfortunately for bulls, it could not convincingly clear that resistance, leaving behind a long upper candle shadow or wick. Resistance held.

Because no clear upside trend is yet reestablished, we can't use the red 9-ema as a reliable benchmark as we often can during a clear uptrend. However, bulls would like to see the SPX maintain daily closes at or above 1600-1615. Such closes would increase the possibility that the SPX might continue toward its next potential upside target, now at about 1635-1655. Potential resistance on daily closes waits in that zone, with that resistance being Keltner, historical and trendline (not shown) resistance.

We don't know yet whether the pullback off the May high is the beginning of a longer decline or just another bull-flag pullback to reconfirm support levels. Last week's dip had seemed to undo that bull-flag interpretation, and it's not until the SPX breaks above that 1635-1655 resistance zone on consistent daily closes that we could label this pullback a bull flag. Even then bulls would be wise to be wary of the potential resistance from about 1670 all the way up to the May 1687.18 intraday high.

Today's candle left open the possibility that the SPX could retreat to test support again. If the SPX drops back now or after a closer test of the 1635-1655 resistance, the possibility remains that this drop from the May high is something more concerning than a bull-flag pullback. Consistent daily closes beneath 1600 increase the chance that the SPX will retest last week's low, with support down to about 1550. Those hoping for a more stable summer want that support to hold, if tested. Otherwise, the SPX sets a much lower potential downside target.

Annotated Daily Chart of the Dow:

The Dow's setup looks much like the SPX's, with the Dow also leaving behind an upper candle shadow or wick. Resistance held on the close. The Dow looks as if it could easily fall back below the resistance zone currently being tested, but first let's consider the bullish case. For now, consistent closes above about 14880 maintain the possibility that the Dow could move higher, especially if those closes are above about 15040. If that happens, the potential upside target would be near 15200-15340, where the Dow faces potential resistance on daily closes from Keltner, historical and trendline (not shown) resistance. The trendline can be drawn from May's high through June's swing high.

We still don't know if the Dow's decline off May's high is part of a longer and deeper decline or if it's just a bull flag pullback that will eventually break higher. Last week's breakdown rendered the bull-flag interpretation less likely, although far from impossible. It's not until the Dow breaks convincingly above that 15200-15340 zone that we can begin to re-label the pullback a bull flag. Even then, bulls should of course be aware of the potentially strong resistance from about 15460 up to the May intraday high of 15542.40.

If the Dow should pull back again, either now or after testing that 15200-15340 resistance zone, the possibility remains that this is part of a longer and deeper decline. Sustained daily closes below about 14880 increase the potential that the Dow could retest last week's low. Those who don't want to see a summer swoon want the Dow to maintain daily closes above about 14490 if it does retest last week's low. Sustained closes below that set a much lower potential target.

Annotated Daily Chart of the NDX:

The NDX has been running higher since last week's low. Ignoring such warnings as doji candles or upper candle shadows along the way, it kept moving higher. Today it moved up closer to next potential resistance on daily closes at about 2960-2990, but it fell back from this resistance test. This resistance is comprised of Keltner, historical and trendline (not shown) resistance. The trendline can be drawn from May's intraday high through June's swing high. After pulling back, the NDX left a bearish candle with a long upper candle shadow or wick. Such candles typically suggest that prices will retreat to deeper support, but nothing is typical these days. The NDX also has support layered down to about 2890.

Last week's drop out of a declining price channel rendered the bull-flag pullback interpretation less likely than it had been, but let's look at the bullish case first. If the NDX rises again tomorrow, it's not until the NDX can sustain closes above about 2990 that we can begin to again think of this pullback as a bull flag. However, even then, the NDX will face potentially strong resistance from about 3030 all the way up to 3088.44, with that May intraday high of 3053.51 perhaps the most significant potential resistance.

If the NDX should roll over, either immediately or after testing the 2960-2990 resistance zone more closely, closes below about 2890 suggest that last week's low might be retested. Those hoping to avoid a summer swoon would want to see the NDX finding support on daily closes above about 2820. Closes much lower than that, particularly below 2800, set a much lower potential downside target.

Annotated Daily Chart of the RUT:

The RUT tore higher the last week. If we're looking at next potential upside targets on other indices, we can see the RUT has already tested the potential next target zone. The RUT, like other indices, pulled back off today's highs, however, and left behind a nubbin of an upper candle shadow or wick. That pullback--and the length of the candle shadow in relationship to the candle body--is not particularly bearish on the RUT, as it is on other indices. If we have to wait to see if these pullbacks off May highs are part of a deeper decline or maybe are just bull-flag pullbacks, the RUT may be one of the first indices to give us an answer.

On the RUT's chart, I've drawn the declining trendline off May's high to show how closely the RUT approaches it. If the RUT rises again, potentially strong resistance on daily closes extends from that trendline up to about 998, but I would extend that at least to the 6/18 swing high of 1001.49. Bulls should be aware of this potentially strong resistance now being approached.

If the RUT sustains daily closes above that potential resistance zone, it has broken higher and relabeled the pullback off May's highs a likely bull flag. It then targets 1008-1020, with historical and Keltner resistance perhaps strong and ready to thwart new breakouts.

If the RUT should pull back now that it's closely approached that declining trendline or perhaps after testing it further, it might now find support near the rising red 9-ema. Failure to sustain daily closes above about 970 set up the potential for a retest of last week's low. In that case, those hoping to avoid a summer swoon want to see support on daily closes holding above 930-942. Failure to sustain closes above 930 set a much lower potential downside target.

Annotated Daily Chart of the Dow Jones Transports:

Like the RUT, the Dow Jones Transports ($DJT) may be the first to tell us whether to look at the decline off May's lows as the beginning of a longer and deeper decline or just a bull-flag pullback to confirm support.

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 was spiking above the nearest potential resistance zone that I had marked on my charts last night, but it couldn't maintain closes above that resistance zone. The resistance held, setting up the potential for the SPX to drop into the next lower potential support zone marked on the chart. That was what it did by day's close.

At the end of the day, the SPX had maintained support on 30-minute closes at the tested next support level. If futures action drives the cash indices lower first thing tomorrow morning, bulls want to see 30-minute closes maintained above about 1609. Failure to maintain 30-minute closes above that level target the next support level from about 1596-1602.

If futures action drives the cash indices higher tomorrow morning or if an initial support test is met with buying, potential resistance on 30-minute closes could start as low as the red 9-ema, but could extend from about 1618-1627. If the SPX can maintain 30-minute closes above that level, it sets a potential upside target near 1651.

Annotated 30-Minute Chart of the Dow:

This morning, the Dow tested the nearest potential resistance zone, but it couldn't maintain closes above that resistance zone. The resistance held, setting up the potential for the Dow to drop into the next lower potential support zone marked on the chart. The Dow did that by the end of the day, falling deeper into the potential support zone than the SPX had.

The Dow needs to hold support on 30-minute closes near its current level, but perhaps as low as 14930, or it risks tumbling first to 14900 and then into the 14830-14880 potential support zone. The next lower target zone is also marked, if that support doesn't hold.

Since potentially strong support on 30-minute closes was being tested at the close, it's possible to see the Dow rise from this tested support. A sharp rise would probably drive the red 9-ema up to about 15030, the bottom of the next potential resistance zone marked on the chart. It's not until the Dow consistently clears today's high on 30-minute closes, however, that it sets the next potential upside target, marked in green on the chart.

Annotated 30-Minute Chart of the NDX:

This morning, the NDX did spike well above the resistance zone I had marked on my charts last night, and the jump was so strong that it also pushed those Keltner lines higher. However, the NDX doesn't always adhere to these Keltner lines as well as some of the other indices. A glance at the recent behavior will show that the NDX did recently produce 30-minute closes that were meaningful with respect to the important Keltner resistance and support levels, but today's move wasn't unusual for the NDX. However, by day's end, the NDX, too, was dropping back below that resistance.

In doing so, it has set a potential downside target near 2910-2921. The NDX dropped as low as 2924.26, but didn't quite reach that potential next downside target. If futures action drives the cash indices lower tomorrow morning, bulls want to see potential support on 30-minute closes kick in at least by 2910. Otherwise, the NDX sets a potential next downside target from about 2890-2902. Failure to sustain 30-minute closes above about 2890 sets a potential next downside target, marked on the chart.

If futures action should drive cash indices higher tomorrow morning or if the NDX should bounce after an initial test of deeper support, resistance might again be found anywhere from about 2935 up to today's high. It's not until the NDX produces consistent 30-minute closes above today's high that the next potential upside target is set. Until then, it's all a resistance test.

Annotated 30-Minute Chart of the Russell 2000:

A glance at this chart shows that, on a Keltner basis, the RUT outdid all those other indices today. It leaped up to test the upper boundary of the nested Keltner channels on this 30-minute chart. The RUT found resistance there on 30-minute closes and dropped back along with other indices this afternoon, all the way to the next potential support zone. It found support there, even scrambling up almost all the way to the red 9-ema by the close of the last 30-minute period. Almost. The "almost" leaves us with the possibility that the RUT could drop back into the support zone again tomorrow morning. Failure to maintain 30-minute closes above about 986 sets the potential for a trip down to 974-980. Failure to maintain 30-minute closes above 974 sets the next potential downside target marked on the chart.

If there's potential for the RUT to sink back into another retest of nearby support, there's also potential for it to rise into another resistance test. The Keltner chart suggests strongest next resistance on 30-minute closes at 995-998, but we of course could see resistance kick in as early as today's 993.60 intraday high.

What's next? Sometimes in the course of writing this Wrap, I realign my own viewpoint. Rather, I take myself out of the heat of the moment, comparing what's happened this week to what preceded it. This last week's charge higher has been so strong that I began writing this Wrap thinking that equity indices might well just keep on charging higher. They might.

However, in the course of writing this Wrap, I was reminded that last week, I had taken into account the possibility that these indices might charge back all the way to the top of their smallest, grey-colored channels and that be nothing more than a relief rally. Relief rallies tend to zoom all the way from the bottom of the grey channel to the top more often than they fall all the way through that channel during rallying periods. In the heat of the moment, we sometimes forget our calmer assessments, made outside trading hours when we have the leisure to examine charts closely.

Therefore, while we couldn't have necessarily expected the indices to rally to this point, it's not unusual that they did so, and I had dutifully mentioned it as a possibility last Monday. It doesn't yet prove anything bullish. It's just part of the process we're watching. We know what we want if our portfolios are positioned bullishly: we want breakouts above the descending trendlines off May's highs, and then we want those May highs to be cleared. We know what we want if our portfolios are positioned bearishly. We want the descending trendlines to serve as resistance and send indices lower again, as they have done in May and June. That's what we know. The rest is supposition. While I didn't end this Wrap feeling particularly bearish, neither did I end it thinking the action was necessarily bullish. Yet.