Market Internals

Introduction

Hawks might have been spotted in the U.S. last week, but enough doves took flight to keep European and U.S. market participants feeling hopeful. They ignored continued concerns about China's economic health and the unrest in Egypt. Today, the Egyptian army fired on supporters of Mohamed Mursi, the newly ousted president. Reuters reports that at least 51 people were killed and 435 injured. In the U.S., President Obama has called for a review of whether annual U.S. assistance should be cut off. Law requires that it be stopped if a freely elected leader is overthrown by the military. The administration also reportedly said that it was not in the U.S.'s best interest to stop the aid program immediately, without that review.

By the afternoon, the administration had updated the markets on another matter. The U.S. Office of Management and Budget projected that real GDP growth would reach 2.0 percent in 2013. This is below the previous projection of 2.3 percent. Projections for 2014 and 2015 were 3.1 and 3.5 percent.

The SPX gained 0.53 percent; the Dow, 0.59 percent; and the NDX, 0.10 percent. The RUT gained 0.38 percent, but the SOX dropped 2.02 percent. Some chipmakers suffered today after Evercore downgraded INTC (23.18, down 3.64 percent) to an underweight rating. Financials as represented by the KBW Bank Index, the BKX, gained 0.55 percent. Retailers as represented by the RLX gained 1.48 percent. However, the Dow Jones U.S. Home Construction Index, the DJUSHB, dropped 2.28 percent today.

Yields dropped today as bonds retraced some of the recent losses. Ten-year yields dropped to 2.645 percent, and thirty-years, to 3.643 percent. Today, Goldman Sachs offered its forecast for rising ten-year yields. The firm predicted that 2014 will begin with ten-year yields at 2.75-3.00 percent and that, by 2016, they will reach 4.00 percent. An improving outlook for U.S. GDP growth and a decline in systemic risks from the Eurozone factored into the forecast along with an assumed reduction in the rate of Fed bond purchases.

Metals rebounded. Gold futures (/GC) for August delivery settled at 1234.90, up 22.2. Silver futures (/SI) for August delivery settled at 19.029, up 0.300. Copper futures (/HG) for August delivery settled at 3.1035, up .0335. Settlement values are provided by Comex.

Crude (/CL) for August delivery settled at 103.14, down 0.08. Tropical storm Chantal is now headed toward the Lesser Antilles, and tropical storm warnings have been issued for Puerto Rico, Barbados, Dominica, St. Lucia, Martinque and Guadeloupe. A tropic storm watch has been issued for St. Vincent. Winds are expected to strengthen over the next two days. The government's NOAA site currently projects a path taking the storm to Puerto Rico by 2:00 pm Sunday.

Monday's Developments

Overnight, Asian bourses turned lower. The yen strengthened, weighing against the Nikkei 225 composite stocks. Market participants in Asia worry about China's economy and the efforts the government might be making to tighten. In Hong Kong, real-estate agents protested against higher sales taxes on high-priced properties. The move was intended to curb soaring real-estate prices, but real-estate agents protest that sales already are slowing due to lower demand. China's Shanghai Composite fell 2.44 percent.

The Nikkei 225 lost 1.40 percent; the Hang Seng, 1.31 percent, and the Straits Times, 0.45 percent.

European bourses reacted to a number of important developments, including last week's hints of a more dovish Bank of England and ECB assurances of low rates for some time to come. In addition, the troika of the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) presented a statement of needed actions after its review of the Greek adjustment program. Greece agreed that policy implementation has been behind in some areas and has acceded to steps to meet fiscal targets for fiscal years 2013-2014. Those steps include efforts to improve employment, increase growth, and improve access to healthcare, as well as selling two bridge banks and completing a four-pillar banking system. Based on the compliance with these steps, the troika was to decide on the next tranche of financial help and whether that tranche would be doled out in installments.

By this afternoon, Eurozone financial ministers were confirming a 6.8 billion euro package to be provided to Greece by October. Europe's financial ministers approved a 2.5 billion euro package for this month and a 0.5 billion euro payment in October, after Germany's September elections. The IMF will dole out 1.8 billion euros in August. Central banks will pay 1.5 billion euros in July and 0.5 billion in October.

The ECB last week said it would keep interest rates low for an extended period, and could even cut further. When asked today if that outlook provided enough clarification, ECB President Mario Draghi said he would watch market reactions. When President Draghi spoke to the European Parliament in the afternoon, he affirmed that the time was not yet appropriate to begin raising rates. He does not believe that the ECB should incorporate dual mandates for providing price stability and supporting full employment.

Today, the German Trade Balance and European Sentix Investor Confidence both disappointed, but the focus appeared to be on those dovish statements and the hope that Greece would skate by without being dinged for not meeting all the requirements. The FTSE 100 gained 0.44 percent; the DAX, 2.08 percent; and the CAC 40, 1.86 percent. Spain's IBEX 35 rose 1.90 percent, and Italy's FTSE MIB, 1.71 percent.

In the U.S., the calendar was light. Moody's Weekly Business Confidence Survey moved higher after last week's steep drop from 29.4 to 26.4. The current report measured 26.8, still well below the 28 level that had marked the bottom of the previous consolidation range. Moody's still characterizes business confidence as "firm at the top of the range," however, with softness in hiring the only sticking point.

May's Consumer Credit expanded much more than anticipated. The number jumped to $19.6 billion from the prior revised-lower $10.9 billion. That seasonally adjusted result was well above the expected $13.2 billion. Lenders apparently were feeling more comfortable loaning money, and buyers, more comfortable borrowing it. They were all so comfortable that the monthly rise in annualized debt jumped the most in more than a year. Similarly, credit-card debt rose the most in a year. Auto loans, personal loans and student loans, reflected in the non-revolving debt, also were strong.

Story stocks included Alcoa (AA, 7.92, up 0.11 or 1.41 percent), traditionally starting off the earnings season. Analysts these days are divided as to AA's importance. Even if AA's earnings no longer set the tenor for the earnings season, that earnings report at least sounds the starting gun for the season.

The company reported a widening loss of $0.11/share due to restructuring costs and weaker aluminum costs. Losses were $119 million versus a loss of $2 million in the year-ago period. However, excluding legal and other one-time costs, the company reported earnings of $0.07/share on revenue of $5.85 billion. This result met EPS expectations and exceeded revenue projections of $5.767 billion. A spike in after-hours trading brought the price up to $8.00 at one point, but shorts may have been covering and that after-hours gain was soon turned into a loss. By the time you read this, it may be either up or down and somewhere yet different by tomorrow's opening. Alcoa saw demand from manufacturers who need aluminum-based projects grow in this quarter, although the company also was hurt by those lower aluminum prices in the quarter. The company lowered capacity by 11 percent.

Dell (DELL, 13.44, up 0.41 or 3.11 percent) figured among the story stocks. Proxy firm ISS concurred with the Special Committee of the Board of Directors that Dell shareholders' best choice was to approve the $13.65/share offer to take Dell private, made by Michael Dell with the backing of Silver Lake. Carl Icahn, offering $14/share, would not concur, of course. Icahn issued a statement that argued against the ISS's recommendation.

One analyst said that Apple (AAPL, 415.05, down 2.37 or 0.57 percent) will cut output of its iPhone by 20 percent in the second half of this year. That analyst was Brian Blair at Wedge Partners. AAPL was down another $0.46 in after-hours trading.

Lululemon (65.93, up 2.38 or 3.75 percent) bounced, but it bounced on lower-than-average volume. Some attributed the bounce to an analyst saying that the company's troubles were behind it, but in after-hours trading the stock was down $0.46 from the day's close.

Facebook (FB, 24.71, up 0.34 or 1.40 percent) announced an expansion of its Graph Search service. The stock gained on lower-than-normal volume.

Clearwire (CLWR, 5.00) shareholders gave the go-ahead to the Sprint Nextel (S, 7.07, down 0.09 or 1.26 percent) bid to buy the rest of the company that it did not yet own. Sprint Nextel will pay $5.00/share, the price it reached after raising its initial offer three times.

Netflix (NFLX, 233.10, up 8.00 or 3.55 percent) jumped today on speculation that CBS (CBS, 50.86, up 0.80 or 1.60 percent) and Warner Brothers (TWX, 60.93, down 0.48 or 0.78) might produce original programming for Netflix.

There's another story stock, but few know its name yet. Pershing Square Capital Management LP said it was raising money over a ten-day period to purchase a stake larger than five percent of a large U.S. company, as yet unnamed. William Ackman sent a letter to his investors letting them know about the action.

After a probe by the New York Attorney General Eric Schneiderman, Thomson Reuters Corp. said it will suspend its practice of releasing the University of Michigan Survey of Consumers data two seconds early to clients paying $6,000 a month to get the information ahead of other Thomsom Reuters clients. Other Thomsom Reuters clients, in turn, receive the data five minutes ahead of the public release. The New York attorney general's office is investigating whether the early release of the data violates the Martin act relating to securities fraud. All clients will now receive the data five minutes before the public release. However, "suspend" is not the same as "end," and one wonders if the practice will be reinstituted as soon as the hoopla dies down.

Another probe has ended without criminal charges. Jon Corzine will not face criminal charges for the use of customer funds in the immediate period leading into MF Global's collapse. He does, however, still face civil charges brought by the Commodities Futures Trading Commission. The Department of Justice dropped the criminal investigation due to lack of evidence, but the CFTC has used recorded telephone conversations to back up its civil case.

Several print journalists speculated on the viability of Bitcoin's plan to introduce ATM's. They also speculated on the likelihood that the envisioned exchange-traded product Winklevoss Bitcoin Trust will attain SEC approval. Bitcoin is a digital currency with value decided by the marketplace. Other than serving as a good plot thickener for an episode of "The Good Wife," will Bitcoins ever be more than a speculative currency that allows for anonymous purchases? That's what people who know more about Bitcoins than I do are still debating.

Let's look at daily charts. Today many indices jumped above a descending trendline off their May highs. The RUT had led the way, taking on its role as leader of the pack and jumping above its analogous trendline on Friday.

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:

Now that the SPX has jumped above the descending trendline off May's high, bulls can use the confluence of that trendline and the rising red 9-ema as a benchmark. Consistent daily closes above the support zone extending from about 1615-1635 suggest further upside, with the next potential target near 1672-1690.

Strong potential resistance on daily closes might be found in that 1672-1690 zone. However, bulls should also be watchful of potentially strong resistance if the June 18 intraday high of 1654.19 or that day's closing high of 1651.81 are closely approached. Until those intraday and closing highs are breached on daily closes, the SPX remains in a pattern of lower highs.

If the SPX should pull back and fail to find support on daily closes at about 1615, a potential downside target near 1588-1604 is set. A failure to find support there on daily closes sets the next downside target, marked on the chart.

Annotated Daily Chart of the Dow:

Now that the Dow has attempted to breach the descending trendline off its May high, the confluence of that descending trendline and the rising red 9-ema can be used as a benchmark. Sustained daily closes above about 15015-15180 suggest a new upside target of 15430-15600. Bulls should, however, be protective of their profits if the 6/18 closing high of 15318.23 or intraday high that day of 15340.09 are approached. That area could also be an area of some resistance. Until the Dow can sustain closes above that zone, it remains in a pattern of lower highs.

The Dow left behind an upper candle shadow today that nearly brought the close back to that trendline. Its breakout remains iffy. If the Dow should retreat and sustain daily closes below about 15015, a new potential downside target near 14743-14847 is suggested. A failure to find support there on daily closes sets the next potential downside target, marked on the chart.

Annotated Daily Chart of the NDX:

The NDX also attempted to leap above a descending trendline off its May high, but the NDX was not successful in creating a solid breakout. As was true with the other indices, however, the confluence of that descending trendline and the rising red 9-ema can now serve as a benchmark. Sustained daily closes above about 2927-2964 set a new potential upside target, where resistance might be found in a wide range spanning from 3033-3100. Short-term bulls should probably make plans to protect profits beginning at the bottom of that range and should also be watchful if the 6/18 close of 2996.09 or 6/18 intraday high of 3001.89 were approached. Until the NDX can break through the 6/18 intraday and closing highs, it's still in a pattern of lower highs.

If the NDX retreats and fails to sustain closes above about 2927, it sets a new potential downside target near 2875-2903. Failure to sustain closes above that set the next potential downside target, marked on the chart.

Annotated Daily Chart of the RUT:

The RUT led the way on Friday, breaking above its descending trendline and closing higher than its 6/18 high. Today it zoomed all the way up to the next target, where it hit a potentially strong resistance zone. In doing so, it achieved a new intraday and closing high. That resistance zone currently spans up to about 1023, but short-term bulls in RUT-related trades should be protective of their profits from now on.

Of course it's possible for the RUT to break through that resistance and keep going. It's done so many times. Low-volume summertime trading can lead to wild momentum runs. It can as easily lead to big jolts down, too.

If the RUT should retreat, the next potential downside target might be found at the confluence of the former descending trendline and the rising red 9-ema. A retreat that finds support on daily closes above 986-998 sustains the bullish tenor and suggests another resistance test. Failure to find support on daily closes above 986, at least, erases the bullishness of the breakout attempt and suggests a potential downside target at the top red rectangle.

Annotated Daily Chart of the Dow Jones Transports:

If the RUT was the leader in last week's push higher, the Dow Jones Transports (^DJT) gamely attempted to ride along. Today, the DJT broke higher, too, although it's far from achieving its next potential Keltner target. The DJT was not as exuberant in leading as the RUT. Given the outsized effect of the RUT's rebalancing on its behavior last week, the DJT's efforts to maintain its breakout might be a good control situation to watch. The DJT should be showing a bit more exuberance than it is, if we're entirely to believe in the RUT's prophecy.

Tomorrow's Economic and Earnings Releases

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

Also important is tonight's CPI and PPI from China.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Since last Wednesday, the SPX has established a pattern of finding support on 30-minute closes at or above its rising red 9-ema. The red 9-ema's current value and that of the other mentioned Keltner levels can be found on the vertical legend on the right side of the chart, although the red 9-ema's is below the price level. As of the close, the 9-ema was at 1639.12, but that dynamic level will move in the direction of tomorrow's first move. The numerical values are colored the same as the Keltner lines for easy viewing. As of the close, the 9-ema was at 1639.12, but that dynamic level will move in the direction of tomorrow's first move.

Until the SPX sustains 30-minute closes below that rising red moving average long enough to flatten or turn it lower, nothing has changed in the short-term tenor. However, it has been a long time since the SPX has tested the bottom of the smallest grey channel. Normally, it would be time for the SPX to pull back through that channel to test support, but the potential support converging near the red 9-ema may be enough to halt any declines without a gap lower one of these mornings.

As long as 30-minute closes are sustained above the red 9-ema, the SPX maintains a potential short-term upside target near 1650-1653. Sustained 30-minute closes below that red 9-ema target the bottom of the grey channel and then the 1625-1629 zone if the grey channel support doesn't hold on 30-minute closes.

Annotated 30-Minute Chart of the Dow:

Like the SPX, the Dow has formed a pattern of sustained 30-minute closes mostly at or above the rising red 9-ema since last Wednesday. Nothing will have changed in the Dow's short-term tenor as long as 30-minute closes continue to be sustained above that moving average and the average continues to rise. The red 9-ema's current value and that of the other mentioned Keltner levels can be found on the vertical legend on the right side of the chart, although the 15215.01 value of the red 9-ema is covered by the current price tab on this chart. The numerical values are colored the same as the Keltner lines for easy viewing.

Sustained closes at or above the red 9-ema maintain a potential upside target from about 15312-15353. Failure to sustain closes above that red 9-ema target the bottom of the grey channel, and then, if that doesn't hold as support, the next marked downside target from about 15085-15119. In a strongly bullish market, the grey channel's support would hold, if tested, and then prices would quickly bounce back above the red 9-ema and hold there. In market conditions that aren't as bullish, the Dow would not bounce or any bounce that did occur might be stopped again at or under the red 9-ema.

Annotated 30-Minute Chart of the NDX:

The NDX had also established a pattern of finding support on most 30-minute closes at or above a rising red 9-ema but that support softened today. The red 9-ema's current value and that of the other mentioned Keltner levels can be found on the vertical legend on the right side of the chart. The numerical values are colored the same as the Keltner lines for easy viewing.

The NDX looks most likely to climb toward resistance from about 2969-2979, but its softness today means that it wouldn't take much to slip back to support from 2948-2955 instead. If the NDX breaks through either next resistance or next support on sustained 30-minute closes, next potential targets are also marked. The NDX doesn't adhere as closely as some other indices to these Keltner zones, but the behavior with respect to the 9-ema does at least tell us when the NDX is strongly rallying, swooning a bit, or in a real descent. In the middle of the day, it swooned long enough to flatten the red 9-ema and tell us to anything could happen next.

Annotated 60-Minute Chart of the Russell 2000:

This chart's interval is switched to 60-minute interval for the RUT. As happens so often with the RUT, a momentum run burst the RUT outside of its boundaries on the 30-minute chart. Since last Monday, however, the RUT has been finding support on most 60-minute closes on the red 9-ema, so that's the chart that should be watched for a change in short-term tenor for the RUT. The red 9-ema's current value and that of the other mentioned Keltner levels can be found on the vertical legend on the right side of the chart. The numerical values are colored the same as the Keltner lines for easy viewing.

Last Tuesday, the RUT pulled back to test the support of the grey channel. Then, within a few one-hour candles, the RUT moved back above the red 9-ema again. That's what bulls want to see if the RUT should drift down to retest the next support zone formed from the convergence of the red 9-ema, the grey channel's support and historical and round-number support. All converge from about 1000-1005, and the red 9-ema would be pushed back into that zone if price dropped. Support that holds there could propel the RUT back up to retest today's high and, perhaps beyond. Today, at least, Keltner resistance held on 60-minute closes, so any bounce toward 1010-1015 should be watched for potentially strong resistance.

Failure to hold that 1000-1005 support on 60-minute closes, however, sets a potential downside target near 991-993, marked on the chart. Other potential downside targets are marked in case that support doesn't hold. As can be seen from the chart, however, no further upside projections are given if the RUT should break up through the upper channel boundary. It would be on another momentum run if that happens, a run that is dangerous for both bulls and bears.

Indices broke out today, although many have yet to have broken the pattern of lower highs. I would have liked to have seen the breakouts occur on robust volume before I believed in them too strongly, but volume was not robust. The good news is that some important benchmarks have now been established, and we can watch them to decide whether the breakouts can be trusted or not.

As this article is uploaded for publication, Nikkei 225 futures (/NKD) are down more than 100 points. Watch how our futures react to China's CPI and PPI numbers as well as weakness in Japan, if it continues into the Nikkei 225's open. Those who want bullish U.S. behavior tomorrow will want to see futures gaining despite any weakness in Asia, as happened today, or celebrating along with any gains in Asia and Europe. Tomorrow, Europe reacts to this afternoon's decisions about the next tranche of monies to be sent to Greece.