Market Internals

Introduction

Last night, Lawrence Summers, rumored to be President Obama's front-runner pick for the next chairman of the FOMC, withdrew from consideration. In recent Wraps, Jim Brown has been detailing the building opposition to Mr. Summers, including the perception that he would dramatically change the amounts or nature of quantitative easing. Summers mentioned the likely "acrimonious" confirmation process for him, should he be nominated. Although a Reuters article pointed to "liberal" opposition as being behind his withdrawal and labeled him "shrewd," "decisive," and "brilliant," we know from Jim Brown's coverage that the opposition was not limited to partisan politicians. It included the 400 economists who wrote to President Obama asking that Summers not be appointed.

The Syrian progress reportedly achieved this weekend and the signing of the accord had already cleared one hurdle for the stock markets. The French president released a statement that France, the U.S. and Britain have agreed that any accord with Syria must include detailed dates that are binding. With that news and Mr. Summers' withdrawal, the dollar and equity futures reacted. The dollar dropped and equity futures jumped higher. Janet Yellen now steps up at the presumed front runner, and she has been much more dovish than Lawrence Summers.

In further news related to the Syrian situation, the UN issued a report on the attack on Syria's citizens. That report concluded that surface-to-surface rockets fired sarin gas.

Futures moved higher and U.S. equities zoomed higher at the open. The Russell 2000 hit a new intraday high, and the NDX and SOX hit new recent intraday highs. While the SPX did not achieve a new high, it did again pierce 1700 at its intraday high. However, with Syria out of the way, at least temporarily, and markets apparently happy with the possibility that Yellen now might be leading the FOMC, another worry surfaced. President Obama said that he will not negotiate over the debt ceiling. Talk about the debt ceiling put a damper on gains as did the specter of what might be concluded at the upcoming FOMC meeting. A White House advisor added that a short-term bridge is possible to avoid a government shutdown, but noted that the House of Representatives remains the real challenge.

Add in another snafu with the Options Price Reporting Authority that stopped some options markets on NASDAQ OMC Group, BATS Global Markets and Miami International Holdings, uncertainty arose. Indices pulled back off their highs, with the depth of that pullback steeper in some indices than others. Tech stocks and small caps pulled back dramatically.

Most indices held onto gains but not the NDX. The SPX gained 0.57 percent, and the Dow, 0.77 percent, but the NDX lost 0.30 percent. The RUT gained 0.22 percent, and the SOX, 0.43 percent. The Dow Jones Transports (DJT) gained 1.33 percent. Boeing (BA, 115.67, up 3.90 percent) and other aerospace companies gained today, helping the transports. Homebuilders benefited from the lower rates seen today with the Dow Jones U.S. Home Construction Index (DJUSHB) gaining 2.25 percent. With several banks reporting on their latest stress-test results, the KBW Bank Index, the BKX, gained 0.80 percent.

Yields were mixed today, with the ten-year yield dropping to 2.8740, down 0.0240 or 0.83 percent, and the thirty-year climbing to 3.8710, up 0.0240 or 0.62 percent. Metals gained today but crude futures were hurt more by the progress in the Syria talks than they were helped by lower dollar futures. Gold futures (/GC) for December delivery settled at 1317.8, up 9.2 points. Silver (/SI) futures for December delivery settled at 22.009, up 0.289. Copper futures (/HG) for December delivery settled at 3.2220, up 0.0185. Light sweet crude futures (/CL) for October delivery settled at 106.59, down 1.62.

Monday's Developments

In Asia, Japan's Nikkei 225 was closed due to a bank holiday. Also, a powerful typhoon hit Japan last night. Other Asian bourses turned in mixed performances. The Hang Seng gained 1.47 percent, and the Straits Times, 1.90 percent, but China's Shanghai Composite dropped 0.22 percent, not able to hold onto early gains.

European bourses reacted to the overnight news in the U.S. as well as to important developments of their own. In Europe, ECB President Mario Draghi spoke, saying that key interest rates were likely to remain at current or even lower levels, with inflation low, the economy fragile, and unemployment high. He expressed hope that a banking union would lead to a faster repair of banks. Duetsche Bank's economists revised higher their estimate of Eurozone GDP growth for 2013, from a more negative -0.7 to a less negative -0.4. For the next fiscal year, the estimates rose from 0.8 percent to 1.1 percent. In addition, German Chancellor Merkel and members of her alliance have won resoundingly in Bavaria, one of the German states. On the negative side of the ledger, a spokesperson for the German finance ministry did not sound as hopeful about the banking union as President Draghi had. The spokesperson said that proposals for the EU Commission banking union still left unaddressed questions.

After weighing the various news bites, European bourses acted much as our futures had. They jumped higher at the open. The FTSE 100 gained 0.51 percent; the DAX, 1.22 percent; and the CAC 40, 0.92 percent. Spain's IBEX 35 climbed 0.65 percent, but its 8999.50 close was well off its 9056.30 high of the day. Today, Spain's economy minister said the country should emerge from recession by the end of this year and should meet its 2013 budget deficit. Italy's FTSE MIB gained 1.05 percent.

Monday's U.S. economic calendar showed a few more entries than we often see on a Monday. September's New York Empire Manufacturing Index took the first slot, producing a disappointment. August's report had measured 8.2, and today's report had expected to measure 9.2. Instead it measured 6.29. The Federal Reserve Bank of New York's summary termed this gain "modest."

Categories that slipped lower included the important orders and shipments, losing 4 and 7 points, respectively. Prices paid and prices received both gained, indicating that manufacturers were able to pass on higher prices to the consumer. Two of the components measuring labor markets, those measuring the number of employees and the average workweek, also improved. The Federal Reserve Bank of New York said the eight- and twelve-point gains, respectively, in those two indices brought each to its highest level in a year.

The future business condition index rose five points, to its highest level in more than year. The index for expected number of employees rose seven points, but the one dealing with workweek expectations stayed at -6.0.

When answering supplemental questions, most manufacturers expected gains or stabilization in overall sales or revenues, employment levels and capital spending for 2013. However, while expecting gains in sales or revenues, manufacturers still trimmed their sales expectations from those noted at the first of the year.

August's Industrial Production and Capacity Utilization Rate were next on the calendar. The prior reports had measured a 0.0-percent gain and 77.8 percent utilization, respectively. Today's report measured a 0.4-percent gain and another 77.8 percent utilization. The capacity utilization rate met expectations, but the industrial production gain was slightly less than the expected 0.5 percent.

The Board of Governors of the Federal Reserve System termed the gains "broadly based" and noted that July's industrial production had dropped. August more than reversed that drop, the board said. The board also noted that production is now at 99.4 percent of its 2007 average, and 2.7 percent above its year-ago level. The year 2007 is the benchmark against which other years are currently measured. Among industries, mines showed an increased output, while that of utilities dropped 1.5 percent, marking its fifth decrease in a row. Production of business equipment jumped 0.9 percent but had dropped by the same percentage the prior month.

Capacity utilization is also running higher than its year-ago level. However, it remains 2.4 percentage points lower than its long-range average, the board said.

Later, Moody's produced its weekly Business Confidence. That number stabilized at 20.4 after dropping several weeks in a row. Moody's characterized business confidence as being "stuck at the lower end of the range" that's been in place throughout much of the U.S. recovery. Its summary reads much like last week's when the number was the identical 20.4, saying that businesses' expectations are encouraging since they're strong.

Story stocks today included Sohu (SOHU, 69.61, up 4.86 or 7.51 percent). The CEO said today that talks with Qihoo (QIHU, 82.93, down 4.93 or 5.61 percent) had been terminated, with those talks centering on a possible purchase of Sohu's search business by Qihoo. The company has no plans to pursue additional search-unit investors in the immediate future, the CEO said.

Apple (AAPL, 450.12, down 14.78 or 3.18 percent)continued the recent pullback. China Telecom Corp. will require its customers to pay more upfront costs for the iPhone 5S than for the iPhone 5, having reduced their subsidy. Apple watchers noted that the company did not give pre-order data for the iPhone today, a break from its pattern with previous releases.

Several bank-holding companies released the results of their midyear stress tests today: Bank of America (BAC, 14.53, up 0.04 or 0.28 percent), Citigroup (C, 51.00, up 0.51 or 1.01 percent), and Wells Fargo (WFC, 42.89, up 0.70 or 1.66 percent). Under the guidelines of the Federal Reserve stress tests, bank-holding companies must maintain a Tier 1 common ratio of at least 5 percent. BAC said its Tier 1 common ratio is 8.4 percent, C said its ratio would not be below 9.1 percent under the stress-test scenario, and WFC reported a Tier 1 common ratio of 9.9 percent. WFC also said that it expects a decline in mortgage originations, with the number expected to be about $80 billion in Q3, as compared to $112 billion in Q2. The company will continue to cut jobs.

While it was busy reporting on its stress test, Citigroup also made a prediction for the SPX. It believes that the SPX will see 1900 by the end of 2014.

Late in the day, JP Morgan (JPM, 53.14, up 0.55 or 1.05 percent) also announced the results of its stress test. Its Tier 1 common ratio is 8.5 percent according to one news source. In addition, JPM and Barclays both dealt with possible fines today. Newspaper reports speculate that JPM will be assessed more than $700 million in fines related to the whale trade in London last year. The board meets today and tomorrow to consider approving the payment of the fines. Barclays said it expected to be fined 50 million pounds for behavior deemed "reckless" when it was trying to avoid a taxpayer bailout in 2008, with the fines levied by the Financial Conduct Authority and Serious Fraud Office in the U.K.

Kennemetal Inc. (KMT, 46.39, up 0.39 or 0.85 percent) has agreed to buy Allegheny Technologies' (ATI, 30.95, up 2.32 or 8.10 percent) tungsten materials business for $605 million. ATI plans to focus on its high-performance metals and flat-rolled products units, units that it believes offer more growth opportunities. KMT believes it will benefit, too, giving the company more of a presence in the energy and aerospace markets.

Capital One Financial (COF, 67.65, up 0.16 or 0.24 percent) released statistics on August delinquencies. Those delinquencies rose for both the company's international and U.S. credit-card businesses, to 3.24 percent from a prior 3.18 percent, respectively.

Sears Holding Corp. (SHLD, 61.32, up 0.90 or 1.49 percent) will seek up to $1 billion through a senior secured term-loan facility to be issued under its existing credit agreement. The monies will be used to reduce borrowings.

Alcatel-Lucent (ALU, 3.33, down 0.12 or 3.48 percent) and technology licensing firm Wi-Lan Inc. have settled all pending patent litigation and reached a patent licensing agreement. Wi-Lan acquires some of those pending applications and a portfolio of patents under the agreement.

More trouble for JC Penney (JCP, 13.64, down 0.18 or 1.30 percent)? Steven Roth, Chairman and CEO of Vornado Realty Trust, has resigned from the board. Vornado will be reviewing its investment in JCP. It currently holds a 6.1-percent stake.

Occidental Petroleum Corporation (OXY, 89.68, up 0.19 or 0.21 percent) announced that it would divest itself of a minority stake in its Middle East operations. Shares dropped off the morning highs after the announcement, but the stock managed to hold onto some gains.

Let's look at daily charts. Early this morning, all daily charts on the major indices looked the same, with big green candles. By mid-morning, differences showed up. While the SPX and some other indices were holding near their highs, the RUT and NDX had dipped much more strongly. By that time, the RUT had dropped more than 50 percent of its day's range, and the NDX had dropped well into the gap from Friday's close. Were the SPX and other stronger indices going to encourage bulls to buy and pull other indices up with them or were the RUT and NDX going to drag other indices down?

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:

The SPX ran straight up into the lower portion of the next potential resistance band, already marked on the chart before the day's trading began. There it found resistance.

The SPX has established a pattern of daily closes above a rising red 9-ema, indicative of the SPX's typical rally pattern, but this newest rally has not yet been tested in fire. The SPX has not yet retreated to a retest of the 9-ema, so we don't yet know that it will find support there and bounce again once it does retest that moving average. It's possible that this week's FOMC meeting or another development could jump the SPX above the current resistance band without a 9-ema retest this week, but it looks time for the SPX to do one of two things. Either it could stall sideways here or after a slight rise while the 9-ema rises closer underneath, or else it's possible that it might retreat toward the 9-ema.

If the SPX instead leapfrogs over the current resistance band and the August high of 1709.67, closing above that resistance, it sets a higher potential target. That target is near 1736-1740.

If the SPX retreats into a retest of support, bulls would like to see support on daily closes found at the red 9-ema, but at least by 1660. Daily closes at or above that level preserve the bullish tenor as long as the SPX then bounces back above the 9-ema and reaches for new highs.

A failure to hold 1660 on sustained daily closes sets a new potential downside target from about 1620-1630.

Annotated Daily Chart of the Dow:

The Dow also ran straight up to test the next potential resistance band this morning, and its pullback wasn't as deep as some other indices. Its daily candle does not look particularly bearish, although the resistance did hold.

The Dow has also has reestablished a pattern of daily closes above the rising red 9-ema, but it's established those closes far above that rising red 9-ema, farther than its typical pattern, without a retest. This week's events certainly could produce enough propellant to send it through the current resistance band and above the August 15658.43 high, but those events could also slam on the brakes and send it down to retest the 9-ema. It appears time for the Dow to stall at or slightly higher than current levels while the red 9-ema rises up underneath it or else pull back into a retest.

If the Dow instead leapfrogs above the current resistance band and maintains daily closes above it, it sets a new potential upside target near 15900-16000. If it instead pulls back soon, potential support on daily closes exists near 15150-15300. A dip all the way to the bottom of that band is still in keeping with a bullish tenor as long as the Dow then soon bounces back above the 9-ema and then produces new highs.

A failure to maintain daily closes above about 15150 sets a new potential downside target from about 14725-14935. An even lower potential target is marked in case support near 14725 should fail.

Annotated Daily Chart of the NDX:

The NDX's chart shows the importance of watching for daily closes. This morning, the NDX did leapfrog over the next potential resistance, resistance that had been important late last week. However, by mid-morning, the NDX had reversed course and pulled back to the top of that resistance band, and, by the afternoon, it had dropped deep inside that band. The gravitational pull of the resistance remained too strong to convincingly set the next potential upside target just yet. That target would be from about 3220-3255. In fact, the NDX's candle looks bearish.

The NDX did retest its rising red 9-ema last week and bounced convincingly from that test, but it sank back to retest it today. If it sinks farther, it needs to maintain daily closes above about 3143 to maintain its most bullish demeanor. Sustained daily closes beneath that level set a new potential downside target near 3087-3120. A failure to find support there on sustained daily closes sets the next marked potential Keltner downside target, but I would also watch for potentially strong support near 3050.

Annotated Daily Chart of the RUT:

The RUT also produced a potentially bearish candle today, although it was produced in the same zone as a zone that produced choppy congestion in July and August.

The RUT jumped up to test its August high this morning, producing a new intraday high of 1065.25. By midmorning, however, the RUT had dropped well off that high, finding the gravitational pull of the resistance too strong to be surmounted. If events of this week propel the RUT above that resistance zone, producing daily closes above about 1067, it sets a new potential upside target of 1076-1088.

Like the NDX, the RUT has recently retested its 9-ema. It is not overdue for a 9-ema test, as are the SPX and Dow. However, if the RUT stalls too long at this level or if events of this week knock it back, daily closes as low as 1040 are still in keeping with the bullish tenor. However, a close that low needs to be followed by a quick move back above the 9-ema and a reach for new highs to maintain that bullish tenor.

Consistent daily closes below about 1040 set a new potential downside target at about 1022-1033. Failure to hold support on daily closes below about 1022 set the next marked potential downside target, but I would remain aware of potentially strong historical support near 1012, too.

Annotated Daily Chart of the Dow Jones Transports:

Last week, I noted that the DJT needed to convincingly break upward out of the descending price channel if it was going to repeat prior bullish behavior, and that it did. Today, with the help of BA and other aerospace companies, it reached toward next potential historical and Keltner resistance. The DJT signals the health of the overall economy and sometimes moves quickly, sometimes in advance of the moves of other indices. It's a good bellwether index to watch as it approaches potentially strong resistance.

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 listed reports for tomorrow, Germany's important ZEW Economic Sentiment will be released at 5:00 am EST tomorrow and Treasury Secretary Lew Speaks tomorrow morning, at 8:15 am EST. Our markets' focus will likely remain on the next day's FOMC decision, but anything that is said or reported that might question what will happen Wednesday might also roil the markets.

As of this weekend, experts predicted that tomorrow's CPI headline number would measure the same 0.2-percent rise seen in the last report, but that the core CPI would ease to a 0.1-percent gain, down from the prior 0.2-percent rise. The NAHB Housing Market Index was expected to remain at 59.

What about Tomorrow?

Moves have been outsized, so we need to look at the 60-minute chart to get a better overview.

Annotated 60-Minute Chart of the SPX:

As it had done on the daily chart, the SPX climbed right up to the next Keltner target on the 60-minute chart this morning. There, it stalled through the rest of the morning and then declined this afternoon.

To maintain its most bullish short-term tenor, the SPX needs to sustain 60-minute closes above about 1691. Then it needs to soon regain the 9-ema's support and climb to new highs. Of course we must now watch for historical resistance to join potential Keltner resistance at the top yellow rectangle since it fell back from today's 1704.95 intraday high.

Sustained 60-minute closes beneath about 1691 then target the next potential Keltner band, from about 1680-1684, where support might be found on 60-minute closes. Sustained values beneath 1680 show a change in tenor from the rally that continued all last week, but the 1668-1673 band contains a support configuration that is often strong unless prices are barreling lower.

Lower potential downside targets stair-step down from there and are marked on the chart, in case a prior higher level's support fails on sustained 60-minute closes.

Annotated 60-Minute Chart of the Dow:

The Dow overran its potential upside target on its 60-minute chart this morning. It moved out in momentum-run territory according to the evidence of this chart. That's a dangerous place for both bulls and bears. Bears get trounced when the expected move back to earth doesn't come before the next push higher. Bulls get trounced when the "to the moon" shot never occurs. And when markets have finished trouncing one contingent, they often turn around and get the other group.

Sustained 60-minute closes above 15440-15475 set up the possibility that the Dow could again reach for today's highs. However, sustained 60-minute closes below about 15440 bring the Dow back inside its Keltner channel setup and set a new potential support retest at the band from about 15370-15400.

Sustained 60-minute closes below about 15370 set up the next potential downside target, and it stair steps lower like that as each successive layer of potential support fails on sustained 60-minute closes. Sustained closes below about 15370 would mark a change in tenor from last week's rally, but the next two lower Keltner targets also mark levels of potentially strong support unless the Dow is just barreling lower.

Annotated 60-Minute Chart of the NDX:

Like the other indices, the NDX shot higher this morning, overrunning one Keltner potential resistance zone, but it couldn't produce 60-minute closes above that zone. It spent all morning retreating to the red 9-ema, retesting it and the bottom of its morning gap, plumbing for support that it didn't find until the next layer of potential support on 60-minute closes from about 3160-3170.

The red 9-ema has flattened, and the NDX has been churning back and forth across it for several trading days. That moving average is no longer serving as a benchmark for anything other than providing evidence that the NDX is churning. If the NDX should bounce tomorrow morning, it's hard to determine if that next potential resistance zone that contains the red 9-ema will be resistance or not, but the next higher 3190-3200 zone could be resistance on sustained 60-minute closes, as it was today. Sustained closes above that zone set a new potential upside target at about 3212-3222.

If the NDX instead declines tomorrow and produces sustained 60-minute closes below about 3160, it will be displaying a change in the short-term tenor it set during last week's rally. That sets a new potential downside target near 3135-3145. Another, lower potential downside target is marked in case that 3135-3145 fails to provide support on 60-minute closes. That particular configuration of Keltner lines is often strong support, however, unless prices are just barreling lower.

Annotated 60-Minute Chart of the Russell 2000:

The RUT also ran up to and pierced potential Keltner resistance at its next target this morning. The 60-minute closes could not confirm the breakout, however, and the RUT also retreated off that high, falling back through the red 9-ema by the close. Potential support on 60-minute closes extends down to about 1052. If the RUT can bounce from there, bulls want to see it sustaining 60-minute closes back above the red 9-ema now at about 1056.92. Such closes would set up a new potential upside target from about 1063 up to today's intraday high.

If the RUT produces sustained 60-minute closes below about 1053, however, it sets a new potential downside target near 1047-1050. A failure to find support there on 60-minute closes would mark a change in tenor over the last week's rally and set the next potential downside target near 1040. That configuration of potential Keltner support found near 1040-1042 often provides strong support unless prices are barreling lower.

What do I think? I think what all should think: sellers used this morning's pop to rid themselves of some of their holdings. The NDX's candle was bearish, and the RUT's and SPX's were certainly potentially bearish. However, the RUT's and SPX's candles was produced within zones that also produced choppy behavior in July and early August, so we really can't make too much of that potentially bearish candle yet without further confirmation. Those candles serve as a warning to prepare but not proof. Nor can we fault those bulls who might have wanted to lighten up a bit ahead of this week's FOMC meeting, tomorrow's CPI, and heating-up discussions of the debt ceiling.

Anything goes ahead of an important FOMC decision, and option traders should be prepared for breakout attempts in either direction, and--unfortunately--for chop that carries through until after we gain some clarity. Who would have been certain late last week that Summers would step down this weekend, leading to today's pop? Perhaps only his confidants, and that wouldn't include most of us. Know how you would prepare your trades for a zip up to the next potential higher target zone and possibly the next two lower potential target zones on the daily charts, as it's possible that any could be hit rather soon if markets break one direction or the other before or immediately after the FOMC decision. I've tried to provide some potential targets to assess.

As a member of the Option Investor staff, my condolences to victims of the D.C. Navy Yard shooting, as well as their families and friends, and to those with missing loved ones in Colorado.