Market Internals

Introduction

The last 24-hour period hasn't been a good one for the global bourses. As this quarter ended, traders in equities, commodities and some bonds were seeking the sidelines to wait out all the uncertainties. Still, markets must pull back now and then and find firmer footing. Political uncertainties here and in Europe helped prompt this particular pullback. Despite the pullback and today's losses in the U.S., many sectors ended the quarter with solid gains.

The day dawned today without any ongoing bipartisan negotiations or meetings scheduled in Washington, D.C. or much hope that a shutdown would be avoided. The Senate reconvened at 2:00 pm this afternoon to take up the budget battle again. House Republicans scheduled a meeting for the same time. As expected, the Senate voted for a clean funding bill. That was no surprise.

Some pundits expressed surprise, however, that Senate Minority Leader Mitch McConnell was reportedly assessing support for a stop-gap measure to keep the government from shutting down for one week. Some pundits also expressed surprise that the House Republicans didn't appear to have a ready response prepared, but perhaps that was because McConnell had tossed that possibility out to them this morning. The end result was all as expected as the day began, however. The House reportedly prepares another bill that will delay the Affordable Care Act, likely to be rejected, too, especially just one day before the next step in the implementation of the Affordable Care Act. President Obama spoke this afternoon. The House has not put the Senate's "clean" bill to a vote, with many commentators indicating that the vote would pass if that were to happen, but that upheaval in the Republican party would result from such a vote.

We knew this was where it was all going. I'm trying to use as neutral of language as I can and many of the particulars may have already changed by the time you read this tonight. Our readers have likely already have taken a stance and made careful conclusions about their own viewpoints. There's little to be gained from rehashing the nitty gritty of interim maneuvering until some movement toward a real resolution has been reached. As of this writing, that real resolution has not been approached. Barring a last-minute solution that is not expected but could still result, the budget will not be concluded by tonight's deadline. What's important on these pages is how the markets reacted today and how it might react tomorrow.

The SPX dropped 0.60 percent; the Dow, 0.84 percent; and the NDX, 0.37 percent. The RUT eased only 0.04 percent, and the SOX was flat, with neither a percent gain nor a loss. The Dow Jones Transports (DJT) lost 0.23 percent. Financials, as represented by the KBW bank Index (BKX), lost 0.27, climbing well off the day's low. The ten-year yield dropped 0.0040 or 0.15 percent, while the 30-year yield climbed 0.0050 or 0.14 percent. Volatility indices climbed, with the VIX gaining 8.15 percent; the RVX (RUT-related), 6.28 percent, and VXN, 7.54 percent.

Commodity traders headed to the sidelines, too. Gold (/GC) for December delivery settled at 1327.0, down 12.2 points. The decline was the biggest in a week, but the move down was on slower volume than Friday's. Silver (/SI) for December delivery settled at 21.708, down 0.123. Copper (/HG) for December delivery settled at 3.3234, down 0.065.

Fears of a global slowdown induced by a U.S. government shutdown hit crude futures, too, as did hopes of reduced tensions between the U.S. and both Syria and Iran, which could result in more supply. Crude (/CL) for November delivery--the highest-volume contract) settled at 102.33, down 0.54.

Monday's Developments

Last night, China's central bank said that its policy would remain "steady," but that policy would be tweaked as needed to deal with any uncertainties that arose as interest rate and yuan reforms were enacted. The goal is to keep the yuan exchange rate stable while other currency reforms are enacted and the currency regime is improved. Then, China's HSBC Final Manufacturing disappointed, reported at 50.2 rather than the expected and prior preliminary 51.2. Instead of rising definitively from August's 50.1, September's number is now calculated as broadly in line with August's. HSBC still termed this slight improvement a "positive development."

What changed since the preliminary release a week ago? Output growth still rose, but its rate of rise was only "fractional" in this report. New business from abroad still increased, with that new business coming from the U.S. and Europe. That new business depleted stocks of finished goods and inventories, and also led to a small increase in purchasing activity. However, production costs rose for 14 percent of respondents. Output prices also rose, but at a rate "below trend," HSBC commented. The increases in output and new work did not lead to an increase in employment, however. Employment declined.

Asian bourses dropped, whether due to this disappointment or from concern over the political uncertainty here and in Italy. China's Shanghai Composite is closed for a national holiday through October 4, so there was no reaction from China. The Nikkei 225 dropped 2.06 percent; the Hang Seng, 1.50 percent, and the Straits Times, 1.32 percent.

In Europe, Germany's retail sales rose only 0.5 percent when they had been expected to rise 0.9 percent. The other triggers to declines in European bourses were continued political upheaval in Italy and the U.S., leading to fears of the ramifications of a U.S. government shutdown tonight. In Italy, Silvio Berlusconi prompted five of his party's ministers to pull out of the ruling coalition and join him, which forces Prime Minister Enrico Letta to scramble for a new coalition before going to parliament on Wednesday. A failure to procure a new coalition in time would require a new election. The FTSE 100 dropped 0.77 percent; the DAX, 0.77 percent; and the CAC 40, 1.03 percent. Spain's IBEX 35 eased 0.46 percent, and Italy's FTSE MIB, 1.20 percent.

One of Monday's most important economic releases was Chicago's September ISM, released fifteen minutes after the open. The headline number was expected to rise to 54.5 from the prior 53.0 but rose more than expected to 55.7. This number often proves to be an important predictor of national GDP because of the region's importance in manufacturing.

Although the employment component was down for the third consecutive month, ISM commented, it was the only "barometer component" that fell. Production, new orders, and supplier deliveries helped the barometer gain 2.7 points. In fact, this headline number has gained for three consecutive months, a record not matched for more than three years, the ISM report notes. Still, the ISM concluded that overall growth shows only modest economic growth.

Was this jump in Chicago's ISM enough to heighten fears about tapering too quickly? That's not likely with a further downturn in the employment component. The conclusions included quotes about "the fragility of the recovery" and the increase in growth being "far from solid" also perhaps make that less likely.

Moody's weekly Business Confidence Survey jumped to 26.2, getting closer from again challenging the 28.0 support level through which it fell on its way to recent 20.4 lows. Moody's noted that that the overall business sentiment improved last week despite all the rhetoric about the budget discussion and the Treasury debt ceiling. As has been true for several weeks, expectations about the economy's growth in early next year have been strong, with Moody's calculating that two-thirds of respondents believe that conditions will improve at that time. The rhetoric wasn't without impact, however, as beliefs about present conditions suffered. Hiring and office space remained weak, as they have been for many months.

The Federal Reserve Bank of Dallas reported September's Texas Manufacturing Survey this morning. That report showed improvement from August's number, with the production index rising to 11.5 from the prior 7.3. Moreover, the capacity utilization, general business activity, and employment indices all rose. New orders, company outlook, and hours worked indices remained flat. Shipments fell, however, as did the wages and benefits index, although the wages and benefits index stayed positive at 9.7. Respondents reported more upward pressure on prices but both raw materials and finished goods indices rose, indicating an ability to pass on higher prices to consumers. Expectations components generally showed strength. Notable is the 10-point jump in the future employment index to 21.9. Despite the proclaimed worries about the Affordable Care Act's implications, responding employers expected to be hiring in the future.

Story stocks include technology and media company Active Network, Inc. (ACTV, 14.31, up 2.91 or 25.553 percent), with the company agreeing to be acquired for $14.50 a share by Vista Equity Partners. The stock closed at $11.40 on Friday. The transaction will likely be completed by the second quarter of the year, the companies said.

JetBlue (JBLU, 6.6650, down 0.0050 or 0.07 percent) rolled out a new service today that they call Mint, the premium experience. Some commenters questioned whether the core customer who chose JetBlue because of its egalitarian treatment of all passengers would revolt. The Mint service will include "the longest lie-flat bed in domestic business class (a) and the only private suites on New York-LA and New York-San Francisco routes," the company said. It will also offer a cocktail and amuse-bouche once in flight, to follow the pre-flight drink. Other amenities are listed. However, a superfast Wi-Fi and upgraded entertainment centers will also be offered in coach.

Achillion Pharma (ACHN, 3.02, down 4.22 or 58.29 percent) revealed that the FDA is not yet ready to release the clinical hold on the company's NS3 protease inhibitor, sovaprevir. The drop was on more than 28 times the average daily volume.

Interbrand announced today that Apple (AAPL, 476.75, down 6.00 or 1.24 percent) has knocked Coca-Cola (KO, 37.88, down 0.52 or 1.35 percent) off the pedestal as the most valuable global brand in the Intebrand listing for 2013. Google (GOOG, 875.91, down 0.48 or 0.05 percent) takes second place, with KO sinking to third place.

Royal Dutch Shell PLC (RDSA.L, 2040.00, up 2.50 or 0.12 percent) said it will sell its Eagle Ford shale stakes, comprising 160,000 in South Texas. The company would continue to operate the wells it has in the region, the Wall Street Journal reported.

J.C. Penney Co. (JCP, 8.81, down 0.24 or 2.71 percent) again made the list of story stocks. This morning, it sank to a low not seen since just before the 1929 stock market crash (Chang and Vaishampayan, MarketWatch). Jim Brown detailed the company's latest woes in this weekend's newsletters, so I won't hash them out again here.

Shareholders at Cooper Tire and Rubber Co. (CTB, 30.80, up 0.13 or 0.42 percent) voted in favor of a buyout by Apolla Tyres Ltd. Apollo had made the move to buy CPT in June.

How different headlines can be from one news source to the other, I found when researching a development concerning Lockheed Martin (LMT, 127.55, down 1.69 or 1.31 percent). One headline said that the Pentagon's inspector general noted "ineffective" and "inadequate" oversight on the F-35 fighter jet program (RANSquawk). Another (Reuters) said "Lockheed, Pentagon cite improved F-35 quality work since end of 2012." Can both be correct? Of course. The first cited the audit completed in December 2012 but not reported until today. Included in that report was the conclusion that LMT was making improvements in oversight since that audit had been completed. LMT may have declined on fears that its business will be hurt by a government slowdown.

After trading closed, Nike, Inc. (NKE, 72.64, down 1.00 or 1.36 percent) announced earnings, beating estimates of $0.78/share and revenue of $6.96 billion. The company reported $0.86/share and revenue of $6.97 billion. At one point in after-hours trading, it traded at $74.60. Remember that after-hours trading does not always predict behavior the next day.

Accenture PLC (ACN, 73.64, down 0.45 or 0.61 percent) didn't meet with the same approval after its earnings met per/share expectations and beat revenue. The company reported $1.01/share and revenue of $7.09 billion, with expectations at $1.01/share and $6.96 billion. The company guided expectations for 2014 to $4.42-4.54/share, however, and analysts had previously expected $4.50/share. The average of the new range comes in below that prior expectation.

Nektar Therapeutics Inc. (NKTR, 10.44, down 0.10 or 0.91 percent) dropped heavily after the close and was once at $9.93 in after-hours trading. The company's study testing a treatment for knee pain did not successfully move from the mid-stage clinical study to the end point.

In late-breaking news, Diamond Foods (23.55, down 0.62 or 2.57 percent) dropped heavily in after-hours trading. It was last at 22.37 as this report was typed. The company reported better-than-expected earnings of $0.09/share on revenue of $199.8 million, against expectations of a break-even per/share report on revenue of $194 million. The company reported that the relaunch of its Emerald lines of nuts, coupled with a lower supply of walnuts, would produce "significant sales and contribution headwinds" next quarter.

Let's look at daily charts for the major indices. We'll see that, last week, action on the major indices was bifurcated. The SPX and Dow began falling beneath a rolling-lower 9-ema, setting new downside targets. Both reached or exceeded those nearest downside targets. However, both the NDX and RUT clung to the support of their 9-ema's. Both broke through them at the open today. What happened next, and what about the SPX and Dow? Did they set new downside targets?

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 rectangles, 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 rectangle, 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:

Last week, the SPX's behavior set a new downside target, now located from 1670-1684. This morning's swoon dropped the SPX down inside that target, but the price began rising immediately. Although the SPX again lost some traction near the end of the day, the support zone it was testing held for today.

Consistent daily closes beneath about 1670 would set a new downside target at about 1627-1643, although that will be driven lower by any sharp move to the downside. That's a make-it-or-break-it point for the SPX. That particular Keltner configuration at 1627-1643 is usually strong support on daily closes, as can be seen from the last two times it was tested. It's also joined by the presumed historical support at that last swing low in late August.

A failure to hold support on consistent daily closes there, however, sets the much lower potential Keltner downside target marked on the chart. I have watched Keltner targets too long to discount them, but I would also be aware of the potentially strong intervening support offered at June's swing low.

What about a more bullish outcome, particularly if some resolution to the budget dilemma is reached tonight or tomorrow morning? Such a surprisingly quick resolution might heighten hopes that our next battle, the debt ceiling battle, can also be resolved.

If the SPX can again maintain daily closes back above the red 9-ema and particularly above the potential resistance zone from 1693-1705, it sets a new upside target near 1720-1733. Keltner, trendline and historical resistance all converge in that area, so bulls should now be wary of rollover potential in that zone. A breakout above 1733, sustained on daily closes, sets the next market potential upside target that is marked on the chart.

Annotated Daily Chart of the Dow:

The Dow's story is similar to the SPX's except that this index proved even weaker than the SPX. It had already slipped down into the next target zone from about 15133-15310 late last week, and then fell below it at the open this morning. Like the SPX, the Dow rebounded immediately but its rebound stalled without making much progress at pulling the Dow back up out of that next support zone. The Dow closed the day near the bottom of that potential support zone. The late-day push lower again may have violated the support but only by a few points and not yet on sustained daily closes.

Still, we have to consider the possibility that the Dow is setting the next downside target. Sustained daily closes below about 15133 set a new potential downside target from about 14855-15025, although there's also potential support as far down as about 15125. That support tends to be lighter than the other Keltner configurations, although it does sometimes bounce the Dow.

What happens if the Dow drops again tomorrow? The downside target from about 14855-15025 is a configuration that is typically strong support on daily closes. It tends to be a make-it-or-break-it zone for the Dow, however. Although we can't discount the potential support at both the August/September lows and the June swing low, sustained closes below about 14855 theoretically set a new potential downside target at the lowest zone marked on the chart.

If the Dow bounces tomorrow, bulls would need to soon see the Dow sustaining daily closes above the 9-ema to even begin to believe in a change in tenor this week. Those closes would have to be high enough or sustained long enough that they flattened that red 9-ema and then turned it higher before we could believe too strongly in the next potential upside target, near 15515-15625.

Annotated Daily Chart of the NDX:

Then we look at the NDX, with its chart that muddies the waters. The setup is much different. Until today, the NDX had still been sustaining daily closes above a 9-ema that still turned higher. Not only had it not dipped toward a new downside target, but also it had not set such a new downside target. Today's open gapped the NDX well below the red 9-ema, but it soon rose up and through that moving average to retest what had been a (yellow) support zone last week, now testing it from the bottom. The test would tell whether that was still support or had been converted into resistance. . . only that test didn't tell today. The bounce was stopped at that former support zone, perhaps now resistance. The possibility exists that it will remain resistance over the coming days. We just can't be sure.

Sustained daily closes above about 3234 would set a new potential upside target from 3250-3280. Of course prices can break above a target, but we're looking at suggested targets here.

Sustained daily closes beneath about 3200 set a new potential downside target from about 3139-3169. A failure to find support there on daily closes would set a new downside target near 3023-3054, where presumed strong support might lie on daily closes. Keltner and historical resistance converge there. If the NDX should break through that support, it could quickly move down to the next marked support level, as it would also be breaking the support of rising wedge shape.

Annotated Daily Chart of the RUT:

Like the NDX, the RUT had spent last week finding support on daily closes at the much-tested, still-rising red 9-ema. It was also looking much more bullish than the SPX and Dow. Today's open broke the RUT below that moving average. The RUT rose sharply, managing a close above the red 9-ema but still within that former support zone that perhaps has now been converted to resistance on daily closes. We don't have enough evidence yet to draw any conclusion.

If the RUT can sustain daily closes above 1080, it sets a new potential upside target from about 1088-1100, where trendline and potential Keltner resistance converge. As with the NDX, we always know that the RUT can overrun next targets, too, particularly if members of our two main political parties decide to hug and be friends.

However, a failure to maintain daily closes above about 1069 sets a new potential downside target near 1045-1056. A failure to find support there on daily closes sets a new potential downside target from about 1000-1015. That rather wide zone would contract toward the 1000 level if prices dropped quickly. However, the potential historical importance of 1040-1045 can't be ignored as potential support, either. The Keltner setup is not showing that 1040-1045 would be more than an interim stopping point if prices began falling sharply, but we know that many buyers might be lurking when the RUT reaches that area, ready to buy. I tend to prepare my neutral trades to deal with a possible quick move to the Keltner target while recognizing the possibility of interim support or resistance.

The configuration at 1000-1015 as well as the psychological import of that 1000 number can prove to be strong support. However, if it's broken on sustained daily closes, a next potential downside target is also marked.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports do not diverge from the action seen on indices such as the SPX and Dow. Since it does sometimes move in advance of other indices and indicate changes in the economy, it still is important to watch it for divergences. If there are none, then it's corroborating what we see on those other indices and may eventually impact such fast runners such as the RUT and NDX, too.

Tomorrow's Economic and Earnings Releases

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

In addition, tonight China's government version of the Manufacturing PMI will be released as well as Japan's important Tankan Manufacturing Index. China's markets will be closed for a holiday, so will not react, but other markets might. European PMI's, both for the Eurozone and for individual countries, will be released across Europe in the wee hours of our morning tomorrow.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

The SPX has again established a pattern of most 60-minute closes beneath a turning-lower red 9-ema. Until this changes, nothing has changed in the short-term tenor. It will soon be time for the SPX to either jump up to test the top of its smallest (grey) Keltner channel or else fall through support that was tested throughout today.

That potential support on 60-minute closes now extends from about 1673-1680. Sustained 60-minute closes beneath about 1673 set up the next potential downside target, now at about 1656-1661. A failure of that support on 60-minute closes outruns potential support on this chart. In that case, the daily chart's potential downside targets should be assessed for a next downside target.

A climb back to 1689-1695 would still constitute part of a pattern of the SPX following a descending (grey) Keltner channel lower as long as resistance near 1695 holds on 60-minute closes and the SPX rolls over within that channel again. A sustained breakout above about 1695 on 60-minute closes changes that pattern that's been in place since early last week. That change sets the next potential upside target, near 1706-1711. A higher potential upside target is also marked.

Annotated 60-Minute Chart of the Dow:

The Dow looks worse by one measure on a Keltner basis than the SPX, but that also means that the descent looks more overdone. The Dow is not only rolling lower beneath the red 9-ema, but it's also finding resistance at an important (purple) Keltner channel line, breaking out of that middle-sized (purple) Keltner channel entirely. It seems likely that the Dow could sink to its next downside target, from about 14984-15020. However, if the Dow moves higher instead, it's likely to encounter potentially strong resistance first at 15129-15189 and then 15262-15323. If either of those potential resistance zones should roll the Dow lower again, its pattern of rolling lower within a rolling-lower smallest (grey) Keltner channel remains in place.

Higher potential upside targets are marked in case the Dow should clear 15323 on sustained 60-minute closes. That remains possible if we should get news by tomorrow that the budget crisis is resolved, particularly if it is resolved in a way that leads to hope that our debt ceiling crisis can also be resolved. It's also possible that if the news grows more rancorous, the Dow could break through that lowest marked potential support level. In that case, look to the daily chart for more potential downside targets and support levels.

Annotated 60-Minute Chart of the NDX:

The NDX also plunged this morning to the same support configuration that the other two indices hit. However, the NDX gathered strength and charged higher, back toward its 60-minute (red) 9-ema. The NDX could not sustain 60-minute closes above that moving average. While the NDX's movements with regard to this moving average are not always as predictive as with the other two indices, it does let us make some judgments and pose some scenarios. While the NDX sustains 60-minute closes beneath its red 9-ema, particularly if those are sustained long enough to turn that moving average lower, the NDX appears more likely to head down toward its next potential downside target. That target spans from about 3186-3197. That's often a configuration that proves to be strong support on 60-minute closes, but if the NDX is gapped deep beneath it tomorrow morning and doesn't immediately bounce or sustains 60-minute closes beneath it, the next potential downside target marked on the chart becomes more a more likely target.

Sustained 60-minute closes above about 3227 suggest it's more likely the NDX will push up toward its next potential upside target, now at about 3236-3243. However, this next target can easily be pushed higher and will be pushed toward the next potential upside target near 3250-3270 on any strong gain.

Annotated 60-Minute Chart of the Russell 2000:

Like the NDX, the RUT gapped down to the Keltner configuration that now provides potential support near 1061-1065, a configuration that is often strong support on 60-minute closes. It proved to be so today as the RUT immediately began moving right back up toward its red 9-ema. The RUT did manage a few 60-minute closes above that moving average, including the last 60-minute period, but it didn't make any headway on those earlier 60-minute closes above it afterwards. For now, we have to conclude that the resistance from 1071-1075 held. The RUT needs to sustain 60-minute closes above 1075 and perhaps above about 1078 before we can say that the short-term pattern in place for the last week has morphed into a more bullish short-term pattern. The next potential upside target in that case would be about 1082-1085, where the configuration there often proves to be strong resistance on 60-minute closes. Of course, the RUT can break through that resistance--could even gap through it first thing--if there's a resolution in the budget crisis overnight, especially if it promises that the debt ceiling debate could find a quick resolution.

If the RUT drops tomorrow and sustains 60-minute closes below about 1061, the next potential downside target is set. That's currently at about 1042-1046.

Several times I've mentioned that if there's a resolution tonight to the budget crisis that hints that we may see an easier resolution to the debt ceiling crisis than is currently anticipated, equity prices could rebound. Currently, daily charts suggest that the SPX sank into a possible support zone, the Dow still has some downside before it reaches its next support zone, and the NDX and RUT may or may not have found resistance today in preparation for a rollover to follow the other indices. If we're to avoid a deeper decline, the SPX needs to hold support just below today's low and the NDX and RUT need to avoid rolling back down through today's lows. Which is most likely to happen? Ask the Senate and the House.

Linda Piazza