Market Internals

Introduction

Many indices appeared due for a relief rally today, and some certainly made an effort this morning. By midday, buyers had given up. Most major indices settled lower. Trading volume was low.

The SPX fell 0.59 percent; the Dow, 0.47 percent; and the NDX, 0.14 percent. The RUT dropped a stronger 1.08 percent, and the SOX, 0.69 percent. The Dow Jones Transports ($DJT) slipped 0.72 percent lower.

Treasury yields rose to new multi-year highs today. Yields on the ten-year note rose to 2.899 percent. Yields on the 30-year rose to 3.902 percent. Homebuilders, as represented in the Dow Jones U.S. Home Construction Index (DJUSHB), reacted to economic news and those higher yields, dropping 3.80 percent. Banks, as represented by the KBW Bank Index, were 1.34 percent lower on a day when the Fed announced that the 18 largest banks in this year's stress test failed in at least one of five categories the Fed views as most important in capital planning and risk management.

With currency moves, the looming FOMC minutes on Wednesday, and news that JP Morgan Chase (JPM) will sell physical commodity assets in September, gold (/GC) futures for December delivery settled lower at 1365.70, down 5.3 points. Silver futures (/SI) for September delivery settled at 23.166, down 0.156. Copper futures for September delivery settled at 3.3320, down 0.310. With protests continuing in Egypt and Libya, crude futures (/CL) for October delivery settled at 106.86, down 0.36.

JP Morgan Chase (JPM) was in the news for another reason, too. A Wall Street Journal article suggested that the financials may weaken with a decision to taper quantitative easing, and news circulated that the China might be investigating the company's hiring practices. After the close, the Wall Street Journal said that the Department of Justice is investigating the company for allegedly manipulating energy markets in the U.S.

Monday's Developments

In many nations across the globe, government bond yields rose. Although rising bond yields and the prospect of even higher yields hurt many global bourses, Asian bourses turned in more mixed performances. The Nikkei 225 eked out a 0.79-percent gain, the Hang Seng slipped 0.24 percent, and the Straits Times dropped 0.76 percent. China's Shanghai Composite percent climbed 0.83 percent.

Some emerging markets were hit hard overnight by those rising bond yields as well as other factors. India's rupee fell in value, and its BSE Sensex dropped 1.56 percent. Indonesia's Jakarta Composite dropped 5.6 percent, and Thailand's SET, 3.3 percent, both also reacting to economic releases.

European bourses were weak before the U.S. open and continued lower afterwards. The FTSE 100 lost 0.53 percent; the DAX, 0.31 percent; and the CAC 40, 0.97 percent. It was those countries with greater debt-service problems that suffered most, however. Spain's IBEX 35 lost 1.86 percent, and Italy's FTSE MIB, 2.46 percent.

Today proved a light day for U.S. economic reports, with none of them typically market moving. None of these releases were included on typical economic calendars for the day, for example. The Bureau of Labor Statistics released July's Regional and State Employment today, saying that regional and state unemployment rates changed very little. Fourteen states produced no changes, eight showed decreases in unemployment, and twenty-eight saw increases in unemployment.

The national jobless rate inched lower to 7.4 percent. That's 0.8 percentage points less than the year-ago level. California, Florida and George led the pack in increasing employment, while New Jersey, Nevada and Maryland lost the most ground. The West region produced the highest unemployment, at 7.9 percent. The Midwest and South produced the lowest unemployment rates, at 7.3 each.

Moody's weekly Survey of Business Confidence dipped to 26.9 from the prior 27.7. Soft demand for office space has again joined soft hiring as the only clouds on a continued bright outlook by Moody's respondents, the company says. The summary still describes the results as "consistent with growth at the high end of the U.S. economy's potential."

Story stocks included Samsung, said to be readying the introduction of its Galaxy Gear on September 4, to be unveiled before Apple's (AAPL) next product release. Experts speculate that the Galaxy Gear will combine the features of a smart phone with a wristwatch-like, wearable device. Sony (SNE, 19.92, down 0.06 or 0.30 percent) will also be introducing a new product the same day. Sony's newest Xperia will include the imaging sensors used in the company's cameras and televisions.

Apple (AAPL, 507.74, up 5.41 or 1.08 percent) might not have been content to let Samsung and Sony steal its thunder before its new launch event on September 10, however. The company said today that its Chinese manufacturing partner would likely begin shipping two new iPhone models in early September. These would be low-end and high-end iPhone versions, with the low-end version destined for emerging markets.

Intel (INTC, 22.28, up 0.36 or 1.67 percent) perhaps benefited from an upgrade and a positive article mention in Barron's. The upgrade was a Piper Jaffray upgrade to neutral from the prior underweight rating.

Total announced today the discovery of deep-water gas condensate off the shore of Gabon. The discovery was made in a pre-salt layer. The company will analyze the data before making predictions. Marathon Oil Corp. (MRO, 32.61, down 1.46 or 4.29 percent), also is a partner in the same license that allowed Total to explore, but the pre-salt gas condensate discovery was a disappointment to MRO. MRO was hoping for oil.

Zillow (Z, 84.74, down 6.48 or 7.11 percent) said today that five million of its Class A shares will be offered, 2.5 million from the company and the others from certain stockholders. Part of the proceeds may be used for acquisition. The company also announced the acquisition of website StreetEasy for $50 million in cash.

Urban Outfitters Inc. (URBN, 39.92, up 0.18 or 0.45) reported after the close and saw its stock price spike more than 5.5 percent from the closing value listed above. The company reported $0.51/share on revenue of $758.5 million, against expectations of $0.48/share, beating estimates. However, revenue fell short of the $768.07 million expected. The CEO mentioned higher merchandise margins and strong customer response to the company's products.

Chinese Internet-based retailer LightInTheBox (LITB, 19.27, up 0.24 or 1.26 percent) plunged more than 36 percent in afterhours trading after lowering estimates for third-quarter revenue. The company predicted Q3 revenue of $68-70 million, with expectations previously pegged at $78.5 million. The company's second-quarter results beat on both EPS and revenue.

Even regional and national non-business news sources reported on a move made by retailer Forever 21. According to a leaked company memo, the company is cutting benefits such as medical, dental and vision coverage to employees and their families at the end of this month and has reclassified many full-time non-management positions as part-time positions. Those employees will not be allowed to work more than 29.5 hours, cutting the hours below those that would require benefits under the Affordable Care Act.

Let's look at daily charts. By the end of last week, many indices had set up new downside targets. What were those downside targets and what would be needed to lessen the likelihood that they would be reached?

Charts

Those new to my Monday Wraps might find the following three 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:

By the end of last week, two consecutive closes beneath the peach-colored 45-ema had set a potential downside target of 1600-1627. To lessen the likelihood of that downside target being hit, the SPX needs to produce consistent daily closes back above about 1680-1687. Until that happens, bulls should be aware that any rally might be a relief rally that would soon find resistance on daily closes, perhaps in that 1668-1687 range noisy with potential resistance.

Bears should be aware that relief rallies can be sharper than anticipated and that bulls haven't really been punished yet by a long-established pattern of buying the dips. Relief rallies can easily send prices careening from one side of the small grey Keltner channel to the other. Therefore, a rally could conceivably zoom all the way up toward 1690-1700 and still be only a relief rally. Closes above about 1710-1715 lessen the likelihood of that downside target being hit and set a new upside target. However, potential resistance on daily closes lurks not far ahead, in that case, at about 1728-1740 by the time it could be tested.

In the case of a drop toward the enumerated downside target, those whose portfolios are mostly longs without downside hedging want to see support at 1600-1627 hold on daily closes. Otherwise a much lower potential downside target is set. It is marked on the chart.

Annotated Daily Chart of the Dow:

By last week, the Dow had not only set a new downside target near 14760-14960, but it had also closely approached that downside target. Today it dipped closer. What is needed to lessen the likelihood that it will actually be touched? Consistent daily closes above about 15475 are needed. Until then, bulls must beware the possibility that any bounce is only a relief bounce destined to find resistance in a zone extending from about 15280-15475 and turn lower again. Prices within that 15280-15475 don't prove anything at all, as that's a zone noisy with potential resistance.

Consistent daily closes above about 15475 set a potential new upside target from about 15725-15940, where the Keltner setup suggests next strong resistance might be found on daily closes. Keltner targets prove useful, but we of course should be cognizant of the possibility of strong resistance near the early August 15658.43 intraday high.

If the Dow does drop into the now-set downside target zone, those whose portfolios are long and unhedged would want to see that support hold on daily closes at 14760-14960. Otherwise a much lower potential downside target is set, marked on the chart.

Annotated Daily Chart of the NDX:

By the end of last week, the NDX had set a potential downside target near 3025-3060, but at least for the first part of the day, NDX bulls tried mightily to push it higher instead. If prices bounce this week in a multi-day rally, the NDX may be the first index that tell us whether a rally might be just a relief rally or something more important. Today's action suggested a relief rally that failed. To lessen the potential for that downside target to be reached, the NDX would have to produce consistent daily closes above about 3120, the area where the red 9-ema might be pushed on a strong rally or continued small gains. Until then, bulls should be prepared for the possibility that resistance on daily closes might be found anywhere from 3090-3120, and that the NDX could turn lower again.

A breakout above about 3120 on consistent daily closes targets 3140-3150, where resistance might next be found on daily closes, with a break above that then soon hitting the next upside potential resistance, at about 3180-3200.

If the NDX turns lower immediately or after testing 3110-3120, those with long NDX-related portfolio positions that are not hedged would want to see the NDX find support on daily closes at its 3025-3060 current downside target. Otherwise, it sets a much lower potential downside target. That target is marked on the chart.

We can see by comparing Keltner channels and moving averages being tested that, on a Keltner basis, the NDX is outperforming the other two indices. It has not yet violated the peach-colored 45-ema on daily closes. It may be good to keep this index on the radar screen to see whether it continues to outperform, maintaining the hope that other indices will follow it, or succumbs to weakness in other indices.

Annotated Daily Chart of the RUT:

By the end of the week last week, the RUT was flirting with setting a new downside target near 980-995, although it hadn't quite set that potential new downside target. Although Friday's close had been below the peach-colored 45-ema, that close hadn't been much below it and that minimal close beneath it certainly hadn't constituted "consistent daily closes below" it. Therefore, whether the next target would be an upside one or a downside one remained in question. By the end of the day today, the RUT had set that new downside target.

If the RUT maintains daily closes below about 1026, the likelihood of it testing its next 980-995 downside target increases. If it produces consistent daily closes above about 1030-1040, the likelihood of prices instead reaching toward its next 1055-1075 upside target increases. On a downturn, bears should prepare for potential support on daily closes kicking in at the downside target, and bulls should assess what they will do if it doesn't kick in there, setting the much-lower next downside target.

If the RUT should be carried higher on a multi-day rally, bulls should prepare for the possibility that resistance might kick in anywhere within the 1026-1040 "noisy" zone, rolling the RUT lower again. We just don't know yet. The longer the RUT stays beneath this zone, the worse the outlook appears.

Annotated Daily Chart of the Dow Jones Transports:

Like the SPX and the Transports' sister index, the Dow, the Transports have set a new potential downside target. For the Transports, that target is about 6140-6225. Consistent daily closes above about 6425 would lessen the likelihood of that downside target being hit. Since this index ($DJT on many charting services) sometimes provides a canary-in-a-coalmine warning of danger, this index is also good to put on the radar screen.

Tomorrow's Economic and Earnings Releases

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

Companies reporting earnings tomorrow include Home Depot (HD), Best Buy (BBY), J.C. Penney (JCP) and TJX Cos. (TJX).

What about Tomorrow?

Due the large moves over the last few trading days, the 60-minute charts prove the most instructive. Many indices continued sliding lower along descending lower Keltner channel boundaries today. It looks time for either a steadying and climb back through those Keltner boundaries or a high-momentum move lower. The steadying could come with either a strong relief rally or some chopping back and forth across descending red 9-ema's long enough to flatten them and then turn them higher.

Annotated 60-Minute Chart of the SPX:

The SPX looks overdue for a bounce, having driven its Keltner channels lower and followed them there for days now. However, it is with chart setups such as this one that our strongest declines sometimes occur as prices just fall out of the Keltner channels. We can't rule out that possibility, either. If the SPX continues lower, especially on strong volume, look to the daily chart's summary for the next potential downside targets.

In order to see improvement in tenor, bulls need to see sustained 60-minute closes above the red 9-ema, and for those closes to either be high enough or sustained long enough to first flatten the red 9-ema and then turn it higher again. In most cases, a quick move above the red 9-ema would result in a pause and then a pullback to retest that average, but our rallies have been so rabid the last few months that they haven't always followed that practice. If such a pullback should occur after a zoom above that average, 60-minute closes need to find support there, of course, to continue the improvement in tenor. Ideally, those closes would also be above about 1658, the top of the next potential resistance zone on this 60-minute chart. Until then, the improvement in tenor is tentative.

A strong rally tomorrow morning will move the averages and channel boundaries shown here. Estimating where Keltner and other resistance on 60-minute closes may be tomorrow suggest that resistance may be found around the last breakdown level near 1660-1665, again near 1671-1674, and then be particularly strong from about 1680-1687.

Annotated 60-Minute Chart of the Dow:

The Dow's setup is similar to the SPX's. The Dow has been pressured lower by a descending red 9-ema, with most 60-minute closes beneath it for days. It has been sliding lower along the descending boundary of its widest Keltner channel. The Dow looks overdue to steady and then attempt a bounce, but we must be cautious about expectations since the most damaging declines can come when prices fall out of such formations. If such a sharp decline should occur, look to the daily chart for the next potential downside target and possible support on daily closes.

To improve the tenor, the Dow needs to close consistently above the red 9-ema long enough to flatten it and turn it higher or else punch high enough above it to turn it higher and then maintain subsequent 60-minute closes above it. Ideally, such closes would also be above about 15090, the top of the nearest potential resistance zone. Such action would move the Keltner channel boundaries and moving averages from their current positions, but potential resistance on such a rebound might be found from about 15110-15160, again from about 15230-15275, and might be especially strong at 15337-15390 and again near 15415-15450.

Annotated 60-Minute Chart of the NDX:

The NDX's setup is different. The NDX had already begun the process of attempting to steady with 60-minute closes chopping back and forth across a flattening red 9-ema, although it hasn't been entirely successful yet. Those who want to see higher prices want to see that process to continue long enough to produce closes mostly above that average, turn the red 9-ema higher and break the NDX above next potential resistance on 60-minute closes, at about 3096-3106. Sustained 60-minute closes above that zone suggest a new upside target from about 3130-3138, although the setup suggests a lot of historical resistance in the 3120 area, too, that should probably be watched.

A failure to maintain 60-minute closes above the red 9-ema suggested a retest of last week's 3068.08 low, a retest that nearly happened this afternoon. A failure to maintain 60-minute closes at or above last week's 3068.08 low sets a new downside target from about 3020-3030.

Annotated 60-Minute Chart of the Russell 2000:

The RUT has been weak, also pressured lower by a sharply descending 60-minute red 9-ema. In addition, today it began breaking down beneath its Keltner channels, suggesting danger if this breakdown isn't soon reversed.

To even begin to change the tenor, the RUT needs sustained 60-minute closes above the red 9-ema, sustained long enough to flatten that moving average and turn it higher or else climb strongly enough to turn it higher. Subsequent 60-minute closes need to find support on that moving average if it's retested.

The danger is that some of the biggest declines come out of setups like this, when prices seem long overdue for a bounce. If the RUT continues to break down tomorrow and doesn't soon bounce, turn to the daily chart for potential downside targets.

If the RUT does steady tomorrow and attempt a bounce, watch for potential resistance on 60-minute closes at 1026-1030, with the red 9-ema likely near that area by the time it would be tested. Resistance might also be found at about 1033-1037, and maybe especially strong resistance at 1039-1043 and again at 1045-1048.

What do I think? I think indices need to steady at least, if not climb, or there's danger of a steep decline. Their daily charts show candles that look like overripe fruit dangling, ready to fall from the tree. In addition, volatility indices have broken through areas that have been resistance over the last couple of months.

Will the steadying or rally come next or will that fruit thud to the ground formed by the next support zone? That, I don't know, but charts have shown us some potential targets and some levels to watch.