Market Internals

Introduction

Market participants coming to their trading and news desks today scarcely knew where to focus their attention. That attention could have been focused on weekend statements out of the Jackson Hole policy conference or on U.N. inspectors headed to the outskirts of Damascus to determine if chemical weapons had been employed. Before the open, an economic release was going to refocus attention, too.

Statements from the Jackson Hole policy conference this weekend often centered on the risks of carrying on easing policies and, conversely, unwinding those policies. In Syria, officials finally allowed U.N. inspectors into an area where an alleged chemical weapons attack last Wednesday was investigated.

Despite both sides agreeing to a ceasefire while the investigation was conducted, people on the ground reported hearing occasional mortar strikes as the six-car U.N. convoy headed into the area. Shots were fired upon the convoy itself, crippling one vehicle but not stopping the convoy.

Blood samples were taken from victims, although some worry that too much time has passed since the attacks for the gathering of such evidence. In an afternoon press conference, Secretary of State John Kerry said that chemical weapons were used, and their use was indiscriminate and large scale. Experts call this the worst chemical weapons attack in twenty-five years. After the inspectors left the area, the ceasefire ended and shelling resumed.

An hour before the open, the Durable Goods and Core Durable Goods numbers disappointed. Perhaps in a bad-news-is-good-QE-news way, many sectors headed higher after the open. Consumer staples, financials and telecom services lagged.

Despite all that news, traders seemed more focused on the upcoming long weekend as the middle of the day neared. By early afternoon, think-or-swim's Sizzle Index, a measure of whether option volumes are tracking ahead of, in line with or below normal options volume showed options volumes well below normal for many indices.

By early afternoon, stronger winds were blowing the markets. Market participants had learned that the U.S. Secretary of State had slated that press conference on Syria. By that time, the U.K. was deciding whether its parliament would be recalled to discuss the situation, and military chiefs from the U.S. and Middle Eastern and European allies were meeting in Jordan. President Obama was also consulting U.S. allies, and Secretary Kerry affirmed President Obama's belief that "there must be accountability."

Then the U.S. Treasury finally released its estimate of when the U.S. would reach its debt limit. That debt limit will be reached in mid-October, the Treasury announced. Treasury Secretary Jacob Lew warned that unless Congress increases the federal debt ceiling before that time, the U.S. government will be unable to pay the money necessary to pay its bills. Previously, it had been believed that the debt ceiling might not be hit until mid-November. Since Congress does not return to Washington until September 9, they have little time for difficult negotiations.

The late afternoon news turned indices lower. By the close, the SPX had dropped 0.40 percent; the Dow, 0.43 percent; and the NDX, only 0.05 percent. The RUT managed to eke out a 0.2 percent gain, but the SOX dropped 0.19 percent. Financials as represented by the KBW Bank Index (BKX) dropped 0.82 percent, but home builders as represented by the Dow Jones U.H. Home Construction Index (DJUSHB) gained 0.44 percent.

Dollar futures dropped modestly, as did ten-year and thirty-year bond yields. Gold futures (/GC) for December delivery settled today at 1393.10, down 2.7 points. Silver (/SI) for September delivery settled at 24.008, up 0.275. Copper futures (/HG) for September delivery settled at 3.3195, down 0.0290. Light sweet crude (/CL) for October delivery settled at 105.92, down -0.50 points.

Monday's Developments

Asian bourses had turned in mixed performances in their overnight sessions. The Nikkei 225 lost 0.18 percent, the Hang Seng gained 0.65 percent, and the Straits Times eased 0.14 percent. China's Shanghai Composite jumped 1.90 percent, however.

In Europe, political turmoil focused tension on Italy, threatening the country's political stability. Silvio Berlusconi's party, People of Freedom (PDL), warned that if Berlusconi is expelled due to his legal problems, they would force an early election. It is not clear whether a majority government could easily be formed if that happened.

In addition, the BBC reported on a follow up to an interview with the Greek finance minister, Yannis Stournaras, that appeared in a German newspaper. Greece had admitted Sunday that it might need an additional 10bn euros. The finance minister said today the country might not need another bailout package after all and could perhaps even go to the financial markets again for money as soon as the second half of next year. All that's needed, he said, was for his country's economy to grow next year, and the government needed to borrow only the amount needed to meet interest payments on current debts, and Greece's citizens would need to pay their taxes. What was not possible, he said, was for the country to again agree to further reductions in the amounts owed to private sector lenders. A renegotiation of the terms of the rescue loans would be necessary instead of that particular tactic. Germany, however, will likely be reluctant to agree to as their elections near.

The U.K. had a bank holiday today, but other European bourses turned lower shortly after their open. After our markets opened, their performances improved and some closed well off their lows. The DAX gained 0.22 percent, but the CAC 40 lost 0.06 percent. Others didn't fare as well. Spain's IBEX 35 lost 0.42 percent, and Italy's FTSE MIB, 2.10 percent.

Today's U.S. economic releases featured the important Durable Goods and Core Durable Goods Orders. Both delivered disappointments. Core Durable Goods Orders, those excluding transportation orders, were expected to show a 0.6 percent gain after the prior, revised-higher 0.1 percent gain. Instead, those orders dropped 0.6 percent.

The headline Durable Goods Orders, including the often big-ticket transportation items and featuring goods expected to last at least three years, was expected to drop 3.0 percent after the prior, revised-lower rise of 3.9 percent. Instead they dropped 7.3 percent. This decrease followed three consecutive monthly gains, the U.S. Census Bureau explained. Excluding defense, new orders fell 6.7 percent.

Fewer orders for aircraft, 5.3 percent fewer, and capital goods drove the number lower than forecast. Most of the transportation drop was in non-defense aircraft and parts. Aircraft and other big-ticket transportation orders are often volatile from month to month. Most of the drop in capital goods was pegged on the 3.2-percent decline in orders for computers and electronic products. Non-defense new orders for capital goods fell 15.4 percent.

Detroit may be glad to know that orders for motor vehicles and parts rose 0.5 percent. Also, in an encouraging sign, the backlog of orders increased 0.4 percent. This backlog may prop up production. Unfilled orders climbed 1.1 percent.

The August Texas Manufacturing Outlook Survey remained positive but slipped to 7.3 from the prior 11.4, the Federal Reserve Bank of Dallas announced. The Dallas Fed concluded that the number showed growth but growth at a slower rate. New orders, shipments, and capacity utilization indices all remained positive, but all slipped by at least 5 points. As has been seen in the Moody's weekly Survey of Business Confidence, however, those indices relating to the outlook for the future have been improving.

In addition, the employment index rose from 9.2 to 11.2. Prices and wages rose, although the hours worked index tumbled from positive territory to -9.9. That's the lowest number in four years, the Dallas Fed remarked, and reflects more people working part-time jobs.

The raw materials price index rose, but this time, so did the finished goods price index. Selling prices increased, indicating that manufacturers were able to pass on at least some of the input price increases to their consumers.

Later, the Federal Reserve of San Francisco said think again when you blame the Affordable Care Act for increases in part-time employment. In a paper written by San Francisco Fed research advisor Rob Valletta and research associate Leila Bengali, the S.F. Fed expressed the belief that the Affordable Care Act has little influence on this recent pattern. This Fed paper notes that laws preventing denial of health benefits to full-time workers already bound large employers before the Affordable Care Act was passed. They advised that Hawaii's move to enforce a state employer health care mandate two decades ago increased part-time work only modestly.

Instead, a well-established pattern of increasing part-time employment exists after prior recessions. The recession of 1982, for example, followed a similar pattern.

Moody's weekly Survey of Business Confidence dipped again this week, dropping to 25.1 from the prior week's 26.9. Although through this week, Moody's was reporting that results were consistent with the U.S. economy's growth at the high end of its potential, today's report summary revealed that "survey responses have been on the soft side during the past several weeks." Hmm. That's not what they said the last several weeks. The company said that some of that softness might be due to the lower number of responses received this summer.

The firm again concluded that the results remain "consistent with growth at the higher end of the U.S. economy's potential." Demand for office space and hiring remain the only soft spots mentioned. Still, those watching this number should be aware that several-month support near 28.00 was broken several weeks ago, and the headline number has trended down since.

Story stocks included Amgen (AMGN, 113.75, up 8.15 or 7.72 percent) and Onyx Pharmaceuticals (ONXX, 123.49, up 6.53 or 5.58 percent). AMGN will acquire all outstanding shares of ONXX, paying $125 cash. This is at a premium to Friday's closing price of 116.96.

Qihoo 360 Technology Co. Ltd.(QIHU, 78.80, up 5.67 or 7.75 percent) reported earnings this morning. The company's $0.40/share earnings soared above the expected $0.26/share, and revenue of $151.7M handily beat the expected $144.19M. These are unaudited results. The company, a provider of Internet and mobile security products in the People's Republic of China, reported record numbers of subscribers: 461 million for its PC-based products and services in June 2013, for example.

Anadarko (APC, 91.02, up 1.22 or 1.36 percent) sold 10 percent of its position in an offshore block in Mozambique. APC retains its position as operator in the area, retaining a 26.5-percent working interest. The sale had not been anticipated but was in line with the company's focus on domestic deals, such as in Colorado, Texas, Wyoming and the Gulf of Mexico. The company's price revalued its other Mozambique assets higher.

Jos. A. Bank (JOSB, 40.50, down 0.35 or 0.86 percent) warned last week that sales and profits for the quarter would disappoint. The company provided figures today for estimated earnings of $0.52/share, down from early estimates of $0.68, on revenue of $232.25M, down from prior expectations of $270.00M.

Direct Edge Holdings and BATS Global Markets will merge, creating what they believe will be the second-largest U.S. stock exchange if volume is used as the determinant. The deal will close the second half of next year, if regulatory approval is received. The private firms will not disclose the terms of the deal.

After hours, news surfaced that Bill Ackman's Pershing Square fund intended to sell all its 39 million share stake in J.C. Penney (JCP, 13.35, down 0.15 or 1.11 percent). That decision was revealed in new SEC documents filed by Pershing Square. Some commentators believe that Ackman was at least partly responsible for JCP's decline. As this report was prepared, the stock had last traded at $13.13, down $0.21 from the close.

JPMorgan Chase & Co (JPM, 51.80, down 0.52 or 0.99 percent) dropped along with other financials. The stock was subject to an analyst downgrade today.

Tropical storm Fernand made landfall Sunday night. Flash flooding was experienced. By late this afternoon, the National Hurricane Center had announced that Fernand had dissipated over Mexico and no further advisories would be issues on the storm.

Let's look at daily charts for major indices. We'll see that a relief bounce came last week where expected, with the NDX and RUT managing daily closes last week above their respective 9-ema's. What's next?

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:

Although the SPX did not play the leading role among the major indices in closing back above its red 9-ema, it jumped above that moving average this morning. It could not close the day above that average, however, with today's trading range straddling it. What's next? Consistent target closes above that moving average target the next potential resistance zone from about 1675 up to May's 1687.18 high. SPX traders would feel more comfortable with that new target if the SPX can clear 1672 on daily closes, however. I know: there's not much room from 1672 to 1675, but that's what the charts give us.

If the SPX reaches for that next target, bulls should be aware of potential resistance on daily closes in that 1675-1687 area. Until then, the possibility remains that gains are nothing more than an oversold bounce on low volume. Consistent closes above that 1675-1687 zone, however, target the 1700-1735 zone, with potential Keltner and historical resistance grouped near the lower and upper ends of that zone.

If the SPX fails to maintain closes above the red 9-ema, a retest of last week's low may be next. A failure to hold prices above about 1636-1640 on the close, but also even more than a couple of hours on a morning drop, targets the next potential support zone near 1615-1634. Failure to hold support at that zone on daily closes targets the June low and then a much lower drop marked by the lowest red rectangle. Keltner evidence suggests that last fall could occur with the SPX moving quickly from failing to maintain one target into the next one, and I've seen it happen that way. However, if the SPX were plummeting lower and I had profit in a bearish trade, I personally wouldn't discount the possibility that the drop could stop at either the June or April lows. I would want to plan ahead of time how I would protect bearish profits in those areas.

Annotated Daily Chart of the Dow:

The Dow has been underperforming the SPX and several other indices by Keltner comparisons. Its rise off last week's low hadn't been particularly convincing, and it hadn't yet closely approached the red 9-ema until today, much less closed above it. It fell back from today's close test. The Dow needs to breach that potential resistance on daily closes in order to set a next potential target from about 15200-15295.

It's not until about 15295 is cleared on consistent daily closes that this begins to look like anything other than an oversold or relief bounce, particularly with the low volume. However, if that happens, the next potential Keltner upside target is set from about 15600-15670. I've learned to give some credence to Keltner targets, but if I were in a profitable long DJI-related trade, I would certainly plan ahead how I would protect my profits if 15400 is closely approached, too, because of the potential historical resistance in that area.

The highest green rectangle marks the next potential upside target if 15600-15670 is cleared on consistent daily closes.

If the Dow turns lower again after the current test of overhead resistance, a retest of last week's 14880.84 low is suggested, with potential support on daily closes waiting there. Failure to hold that support on consistent daily closes sets a much lower downside target, marked on the chart. As was true with the SPX, I have seen such targets achieved and achieved quickly after support is breached. However, if I had a profitable bearish trade in progress, I would not discount the possibility of a tumble being stopped at either the June or April lows.

Annotated Daily Chart of the NDX:

Last Monday, I noted that the NDX had been outperforming on a Keltner basis and should be watched for clues as to how the other indices might behave or when a turnaround might occur. The NDX cleared the red 9-ema last week and has consistently closed above it since then, leading a few stragglers higher with it. Today, it reached the bottom of its next target and potential resistance zone. That zone extends from about 3141-3171, with potential historical resistance joining potential Keltner resistance in that zone. If the NDX clears that on consistent daily closes, the next potential upside target extends from about 3190-3210. However, the NDX was knocked back from its resistance test today, and the possibility exists that the resistance will hold firm and turn the NDX lower again.

If the NDX is turned back from the currently tested resistance zone or if it falls back through that zone after testing the next higher one, potential next lower support ranges from about 3090-3115. Failure to hold support there on consistent daily closes targets 3026-3059. A lower target is also marked, in case that one doesn't hold.

Annotated Daily Chart of the RUT:

The RUT also cleared its red 9-ema last week on a couple of daily closes and managing another close above it today. That set and maintains a potential new upside Keltner target at a resistance zone that extends from about 1048-1060. Today, however, the RUT experienced a little trouble with that gap resistance from its 8/15 gap lower, so it's possible that the RUT might not make it up to that next potential target. If it does, and if it produces daily closes above about 1060, it sets a new potential upside Keltner target at a new potential resistance zone, from its 1063.52 recent high up to about 1075.

If the RUT is turned back instead, the potential support zone is unfortunately quite wide. It extends from the 8/19 low of 1013.23 up to that red 9-ema and is comprised of both Keltner and historical potential support. It's impossible to say which of those potential levels might catch the RUT if a tumble is going to send prices lower again. However, a failure to hold support by the bottom of that range or at least by about 1008 sets up a potential downside target extending from about 985-1000. Support there could bounce it right back to the red 9-ema.

A failure to hold support by about 985, however, sets a much lower potential Keltner target. I've especially seen the RUT tumble right down to such an impossible seeming downside target. However, if I were in a profitable bearish position and the RUT was tumbling toward that next target, I would certainly be aware of rather strong potential historical support that could kick in either side of 940.

Annotated Daily Chart of the Dow Jones Transports:

The DJT sometimes gives us a heads-up as what is to happen next and should be kept on the radar screen for that reason. Right now, however, it's just corroborating what other indices are showing us.

Tomorrow's Economic and Earnings Releases

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

In addition to these indicated releases, Germany's important Ifo Business Climate will be coming out at 4:00 am ET tomorrow morning. Traders waking up tomorrow might want to check to see how European markets responded, and whether our futures seem to be behaving in lockstep or ignored the response, whether positive or negative. For example, this morning, European bourses were negative as our open approached. Our futures were also negative in many cases but not exceedingly so, indicating a discounting of the European news. That cleared the way for early gains.

We should of course be on the lookout for any decisions coming out of the allied discussions about Syria.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX spent most of the day today chopping out a consolidation zone from about 1664-1670. Thirty-minute closes within that zone told traders nothing about next direction. Closes below it suggested a drop toward 1658-1662, where next potential Keltner support on 30-minute closes might exist. When the SPX broke down through that congestion zone this afternoon, it barreled to and slightly through that next potential support zone, hitting and slightly exceeding its nearest downside Keltner target.

It has set a new downside target. If the SPX bounces first thing tomorrow back into that 1664-1670 zone, we again must question what happens next. However, if, on a bounce, that 1658 area does not hold on consistent 30-minute closes, the next lower potential targets are marked on the chart, with the nearest from about 1649-1654 and the lowest near last week's low. As of the close, it looked most likely that the SPX would head toward that 1649-1654 zone.

If the SPX reverses the late-afternoon trend and climbs, it again faces potential resistance on 30-minute closes from about 1664-1670. Consistent 30-minute closes above it suggest a new potential short-term upside Keltner target of about 1685-1690.

Annotated 30-Minute Chart of the Dow:

The Dow also spent much of the day chopping out a consolidation zone, in this case from about 15000-15050. As long as 30-minute closes were within that zone, we knew nothing about next direction. A breach of about 15000 on 30-minute closes targeted the next downside target extending from about 14925 down to last week's 14880.84 low. The Dow closely approached that potential next target but didn't quite get there. As long as 30-minute closes remain below 15000 and maybe below 15050, that potential next downside target remains a viable target. As of the close, that looked like the likely next action for the Dow, but potential support on 30-minute closes may be waiting at that level if the Dow does drop early tomorrow.

If the Dow instead steadies and rises to retest the 15000-15050 zone, resistance may now be waiting since historical resistance at today's high will now be added to Keltner potential resistance. If the Dow can manage 30-minute closes above about 15050, the next potential upside target zone ranges from about 15070-15120. In turn, consistent closes above that zone target 15290-15310, where next resistance might also be found on 30-minute closes.

Annotated 30-Minute Chart of the NDX:

When other indices dropped through potential support this afternoon, the NDX did, too. It fell all the way to the next potential support zone, a 3115-3121 potential Keltner zone I had already marked out by the time the afternoon decline started. The NDX has temporarily found support there on 30-minute closes. If it can bounce off that support tomorrow and climb, it will soon re-encounter that 3032-3140 Keltner zone that may now be converted to next resistance on 30-minute closes.

Consistent 30-minute closes above about 3140 target 3145-3150, where next resistance might lie. A breakout above that zone on 30-minute closes targets a zone from about 3144-3152.

What happens if the NDX heads lower instead? Unless the NDX gaps below it, support could possibly kick in soon, at least by 3115. Both Keltner and new short-term historical support could possibly be found there on 30-minute closes. A failure to hold that support targets 3098-3108, an unfortunately wide short-term target that includes both Keltner and historical/gap potential support. Any one of those could catch hold as potential support. However, a failure to hold support there on 30-minute closes targets last week's low down to about 3054.

Annotated 30-Minute Chart of the Russell 2000:

The RUT followed the pattern of some other indices on their 30-minute charts. It chopped out a consolidation zone surrounding Keltner targets through most of the day, then fell through all the way to the next target this afternoon. If it can find support on 30-minute closes from about 1034-1037, it maintains a next upside target back at that same consolidation zone it spent so much time chopping out this morning. Resistance could kick in as low as 1040, however, and it extends up to about 1045.

If the RUT can break through that resistance on 30-minute closes, it sets a new potential next target at about 1048-1052. However, if the RUT is turned back and then falls through the support zone it tested this afternoon on 30-minute closes, the next potential downside target ranges from about 1029-1032. A failure to hold support there on 30-minute closes targets 1020-1023.

What do I think? NDX, our leading index of late, slammed into resistance and was knocked back. Its daily candle suggests a pullback comes next, but even if that is true, it may be a pullback only within the nearest support zone. The SPX also hit a potential resistance level and certainly found resistance there today. Its short-term 30-minute chart shows that at least a modest decline might be due first thing tomorrow morning, as does the Dow's. The Dow found resistance at its daily 9-ema. However, if the SPX and Dow 30-minute and daily charts suggest that at least a modest pullback is the most likely next action, the RUT and NDX's 30-minute charts are less clear about the immediate short-term action.

The RUT climbed above its 9-ema on its daily, but couldn't make any upward progress, and its daily candle also indicated some indecision and the possibility of a pullback to retest just-cleared support.

Pullbacks to test support are possibilities now and are certainly given a fair chance by the chart setups. However, I would feel more comfortable making that prediction if those daily candles had been produced on strong volume, indicating that bulls and bears were really battling it out. That would suggest that we were getting a fair look at how bulls and bears would line up in the end. If volume had been strong, but selling still overcome the buyers, a conclusion might be drawn. Instead, we got a light volume (and light options volume) day that just showed indecision. Under those conditions, markets can be pushed around by news bites, and this afternoon produced enough to worry traders.

I would certainly prepare for the possibility that last week's lows and even the next lower targets on those daily charts could be next, but I wouldn't bet the farm on it. The wind that blows one direction one day can blow the other direction the next and our markets are susceptible to being blown by the wind.