Market Internals

Introduction

Volume proved light today. Perhaps most traders didn't want to be at their desks today while the political debate ground on for yet another day. Bond traders and some others in the U.S. relaxed away from the grind of relentless political wrangling.

Across the globe, traders and investors proved indecisive amid uncertainty engendered by ongoing U.S. political upheaval and weak Chinese export data. I have little appetite for writing about the political battle going on, either. At least I can assure readers that I will write about it with the most neutral language and attitude that I can manage. You're not going to read emotionally loaded words such as "ransom" here. Some arrows will be slung, but they'll be slung at both sides. If your side seems to be struck by the first arrow, hang on through the next sentence or two and you'll find the arrows pointed another direction. It's not my job to persuade you to adopt my beliefs. Rather, it's to tell you what might impact your trading environment. To that effect, the full honor of their titles will be accorded to all parties involved, and all proposals and laws will be named as accurately as I can manage. I'm old enough and prudish enough to feel that I belittle myself individually and my country as a whole if I were to take liberties with the names and titles of government officials, whether I personally voted for them or not.

This weekend, Senator Susan Collins (R-Maine) proposed a deal hammered out by a bipartisan committee, a deal that many considered reasonable. Not House Republicans. They said they would not even vote on the plan. There were no woulda-shoulda-coulda worries on that score, however, since Democrats also objected to the plan in its then-current incarnation. The plan that would have included raising the debt limit for a year and opening government for six months also postponed the medical device tax for two years and asked Democrats to accept extended sequestration levels. Democrats objected that they hadn't received any concessions in return for rolling back the medical device tax and extended sequestration levels.

At issue initially was the way shortfalls would be addressed, in what month or year, and whether lawmakers would be asked to break currently established budget caps. Republicans want entitlement cuts while Democrats allegedly want more revenue balanced against some mandatory and entitlement cuts in a mix that Republicans find objectionable. (For whatever it's worth, as someone who has contributed to Social Security for four and a half decades and whose husband contributed much more, for longer, I understand those of you readers who bristle at Social Security being labeled an "entitlement" program, but I'm reporting the language being used.)

A rare Sunday session of Senate Majority Leader Harry Reid (D-Nevada) and Senate Minority Leader Mitch McConnell (R-Kentucky) was variously reported as failing to find a solution and as making progress, depending on the source. At least one unnamed source--an aide privy to the discussions--denied that Democrats want to break the budget caps for 2013, saying that if House Republicans would pass a clean funding bill through December as originally proposed, the debate over 2014 funding levels would be dropped for now.

House Republicans were meeting, too, and were allegedly thinking about adding additional amendments. Some of those were unpopular suggestions with Democrats, but whether that "thinking about" rose to the level of anything more than a brain-storming session wasn't clear at the time. One purported measure included putting off the debt crisis for only six weeks. Another allegedly discussed measure included income verification measures for the Affordable Care Act, and another would amend health care benefits for congressional staffers. Lest you believe that income verification measures for the ACA sound like a good idea, be assured that the act already includes such measures. Anyone intending to sign on to the government's site to apply is counseled to gather paycheck stubs or 2012 tax return, Social Security number and insurance policy numbers, among other information. The thought-about amendment on health care benefits for congressional staffers would require them to pay more for their health care.

Some news sources thought that an accord would never be reached in time this week. Others protested that an accord could be reached within 24 hours. Meanwhile, at least one world financial leader warned that the U.S. was moving disastrously close to causing a global disaster. In addition, China's official press agency sometime today also reiterated its threat of considering a new reserve currency. That was the climate as Asian markets traded, European markets opened ahead of the Eurogroup meeting in Brussels, and U.S. futures dropped in the pre-market session.

Then, midday, news circulated that President Barack Obama, Vice President Joe Biden, Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi (D-California) were to meet at 3:00 pm ET. Various politicians issued cautious statements about progress being made. The RUT rushed up to a new intraday high, and other indices built on the earlier gains after the morning lows. Then the meeting was cancelled by the White House. It was thought that Senators were close to a deal, and the White House reportedly wanted to give them more time to reach that deal. After a few moment's hesitation, indices gained again.

As I write this report, Senators are still reportedly close to a new deal although "many hurdles remained" (Reuters). I heartily hope that by the time you read this report submitted earlier that everything I've said has been rendered moot by a firm agreement that can be supported by both sides of the aisles, in both the Senate and the House.

Despite the early morning dip and the ups and downs of the day's developments, our indices bounced well off their day's lows. The SPX gained 0.41 percent; the Dow, 0.42 percent; and the NDX, 0.69 percent. The RUT gained 0.55 percent, and the SOX, 0.73 percent. However, one caution after the bullish developments is that the TRAN gained only 0.08 percent.

Gold futures (/GC) for December delivery settled at 1276.60, up 8.40. Volume was only about half Friday's volume, however. Silver futures (/SI) for December delivery settled at 21.354, up 0.095, also on volume about half Friday's volume. Copper futures (/HG) for December delivery settled at 3.3030, up 0.0340, but volume was roughly equal to Friday's volume. Bloomberg metals market analysis suggested that a glut of copper at a time when there were growth concerns about China capped gains in copper futures.

Today's U.S. bank holiday meant that the bond market was also closed.

Monday's Developments

In his weekend Wrap, Jim Brown mentioned China's disappointing export growth announced on Saturday. In China, PPI gained 0.1 percent, less than the forecast 0.3 percent, but new loans of 787B yuan far outstripped the expected 669B or the prior 711B. This figure, produced by the People's Bank of China, details yuan-denominated loans issued to businesses and consumers. This was not necessarily a sign of more liquidity, apparently, as I first supposed. Another figure that measures liquidity--total financing aggregate--dropped to 1.4 trillion yuan against the prior 1.57 trillion yuan. M2 money supply had risen 14.2 percent, in line with forecasts.

Several Asian bourses were closed overnight, while others were mixed. The Nikkei 225 and the Hang Seng did not trade. The Straits Times lost 0.45 percent, but China's Shanghai Composite gained 0.43 percent.

The Eurogroup meeting today was not likely to conclude with a decision about further financing for Greece, European Economic and Monetary Affairs Commissioner Olli Rehn warned. The gathered finance ministers apparently did discuss their choices for a joint or common bank bailout fund, but with Germany and some other countries still looking askance at the idea, such discussions were preliminary ones. Meanwhile, ECB Executive Board member Joerg Asmussen believes that Spain and Ireland will exit their bailout programs this year.

European bourses started out in negative territory but most climbed well off their early lows by the close. The FTSE 100 gained 0.29 percent; the DAX lost only 0.08 percent; and the CAC 40 squeezed out a 0.07 percent gain. Spain's IBEX 35 gained 0.19 percent, and Italy's FTSE MIB also gained 0.19 percent.

Moody's weekly Business Confidence Survey climbed again this week, running up to 30.4, well above last week's 28.7. Various current measurements of business confidence weakened, Moody's said, but the firm called expectations for early next year "notably strong." As has been typical for many months, office space demand and hiring remain the only soft components. Moody's has still not returned to the terminology that said that the results were typical of an economy expanding near "the top of" its potential, but does say that it's "expanding near its potential."

Story stocks included J.B. Hunt Transports (JBHT, 73.18, down 0.82 or 1.11 percent), expected to report earnings today. The company did not announce the time of its earnings report. As this report is prepared, the company's report is not yet available. I checked multiple times.

Packaging Corp. of America (PKG, 58.52, up 0.92 or 1.60 percent) was also expected to post earnings today. The company reported earnings of $0.91 per share, excluding special items on income of $89 million, a "record" income, the company said, and record sales of $845 million. Increased volume and higher containerboard and corrugated products prices and mix helped produce those earnings, although labor, energy, transportation, chemical, fiber, and incentive compensation costs were higher. The year-ago comparison had been $53 million or $0.55 per share. As this report was prepared, the stock was up $1.25 above the closing price to $59.75.

Consol Energy (CNX, 38.42, up 0.25 or 0.65 percent) said today that it wants to reduce its coal holdings in order to focus more on natural gas.

Superior Energy Services (SPN, 25.81, down 0.06 or 0.23 percent), a provider of specialized oilfield services and equipment to oil and gas companies, reported its preliminary estimated 2013 Q3 earnings range. The guidance of $0.39-0.41 per share was below expectations. The company pointed to reduced utilization and pricing for several of its land services in the U.S. The company also authorized a share buyback program.

Teva Pharmaceutical Industries Limited (TEVA, 40.36, down 0.68 or 1.66 percent) reported that it had received approval from the U.S. Food and Drug Administration for its generic equivalent to TOBI (R). TOBI--Tobramycin Inhalation Solution US--is currently marketed by Novartis and has annual U.S. sales of about $350 million.

Myriad Genetics (MYGN, 23.87, up 1.10 or 4.83 percent) reported positive results from a verification study. The study tested Myriad MyPath Melanoma test's ability to differentiate malignant melanoma from benign skin lesions. The data was unveiled Sunday at the American Society of Dermatopathology Annual Meeting.

Coach, Inc. (COH, 54.12, down 0.47 or 0.86 percent) received a downgrade from an analyst at Canaccord Genuity. The analyst predicted that U.S. stores sales would drop six percent in the third quarter due to less traffic and more competition from Michael Kors.

Nokia (NOK, 6.62, down 0.03 or 0.45 percent) reached a deal for its new models that will include free subscriptions to Netflix (NFLX, 324.36, up 23.51 or 7.82 percent). NFLX also benefitted from news that it has ordered a new psychological thriller from Sony Pictures Television and the creators of "Damages" (Reuters).

Microsoft (MSFT, 34.45, up 0.32 or 0.94 percent) also announced that its Windows 8 operating system would be updated on new Nokia smartphones and tablets. The update would support Qualcomm's (QCOM, 67.75, up 0.20 or 0.30 percent) Snapdragon 800 processor.

Expedia (EXPE, 48.51, down 3.22 or 6.22 percent) fell on three times average daily volume after a downgrade.

Teradata Corporation (TDC, 52.58, down 0.37 or 0.70 percent) swooned in after-hours trading, and, as this report was prepared, was last at $46.46, down 6.12 or 11.64 percent from the day's close. As part of its earnings report, the company cut its outlook for the full year. The company now expects $2.70-2.80 per share with previous expectations at $2.85 a share.

Yahoo (YHOO, 34.00, down 0.15 or 0.44 percent) announced that the company will employ hashtag #[company symbol]earnings to accept questions from the public during its earnings call tomorrow after the close. Of course, you would insert the company's symbol, without the brackets, but I do not know if bots can pick up hashtags from printed sources, and I'm being careful.

Let's look at the daily charts. They'll show that last week, indices dipped to or toward the bottom of rising price channels and then rebounded higher again through those channels. Can we gain any insights into what happens next?

Charts

Those new to my Monday Wraps might find the following several 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 rectangles 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 hit the bottom of its regression channel, dipping all the way to the converged important Keltner support zone that now extends from about 1633-1647 before rebounding. The SPX bounced through the red 9-ema and all the way to the midline of its long-time regression channel, where potential Keltner resistance also waits just overhead. Combined midline, historical and next Keltner resistance extends from about 1704-1716, although the grey channel resistance could easily be shoved higher by a jump in prices. Prices that break above about 1716 on sustained daily closes set a new potential upside target from about 1722-1736. Breakouts there on sustained daily closes set a new target from about 1753-1765.

What happens if the SPX is rolled down by current or higher resistance? In that case, SPX bulls would like to see the SPX sustain daily closes at or above the red 9-ema, which would likely be in a zone from about 1679-1692 if it's tested within the next couple of days. Then they would like the SPX to bounce from that support test. A failure of support at about 1679 on sustained daily closes would then set a potential downside target at about 1655-1667. A more important and somewhat more critical potential target and support level lies from about 1633-1647. Sustained daily closes beneath that level would confirm a failure out of the SPX's long-term rising regression channel. A lower potential downside target is marked in case that should happen.

Annotated Daily Chart of the Dow:

The Dow has long since broken out of its long-term rising regression channel to the downside, so it shows relative weakness when compared to the SPX. Last week's decline tested an important Keltner support zone, one that now ranges from about 14695-14860. The Dow bounced higher after that downside test, also moving up through its red 9-ema on the bounce. On any pullback from today's levels, Dow bulls would like to see support held on daily closes above that red 9-ema, which is likely to be anywhere between 15014-15201 if it were tested within the next couple of days. Support that holds within that zone on daily closes should be followed by a bounce if the Dow is to reassert its strongest rally pattern.

The next upside target in that case would be the upper grey channel's resistance, but that could be shoved higher with a strong upside move. It might range from about 14338-15475 in the next couple of days. Next resistance and potential upside target is historical, Keltner and trendline from about 15577-15756. A higher potential upside target is also marked in case the Dow should sustain daily closes back inside the former rising regression channel.

What if the Dow rolls down beneath last week's low? While we should not discount the potential historical support offered at June's low and then May's low, the Keltner channel setup offers a much lower possibility, marked on the chart.

Annotated Daily Chart of the NDX:

The NDX continued to outperform last week. Although it broke through a trendline that could be drawn from its June and August lows (not shown), it stopped at the automatically-drawn lower boundary of its rising regression channel. Essentially, then, all it did was broaden its channel from the more unstable rising wedge form to a more stable rising channel form. For now, that's all it's done.

Like the SPX and Dow, the NDX promptly burst up through the red 9-ema again after last week's support test. The NDX's movements through the 9-ema are not as predictive as they can be for the SPX and Dow, but it was still one item that NDX bulls liked to have seen checked off the list. The NDX rose all the way to the midline of its rising regression channel and into the congestion zone that mired it for a couple of weeks. The NDX needs to sustain daily closes above about 3257 on sustained daily closes before bulls can assume that it's broken out to the upside again. Even then, it might soon face formidable resistance from the Keltner zone that stretches from about 3270-3310.

What if the NDX rolls down through the red 9-ema again? Potential support stair steps below the current level, so it was hard to choose the most important potential support levels. What about potential round-number support at 3200? The top of the gap from October 10? Sticking with Keltner levels, it's probably important that the NDX sustain daily closes above about 3140-3171 or it risks setting a new downside target from about 3036-3071. An additional potential downside target is also marked, in case all other support levels should fail.

Annotated Daily Chart of the RUT:

Talk about outperformance. Last week, the RUT approached the bottom of its rising regression channel and did hit the bottom of its smallest Keltner channel. The convergence of the support offered there as well as 1040-ish historical level were enough to hold prices before the late-week rebound, and what a rebound that was. That rebound brought the RUT back up through the red 9-ema and right back through to the top of the congestion zone from late September and early October, into another new intraday and closing high today.

On a Keltner basis, the RUT will not have broken through that congestion zone to the upside, however, until it produces consistent daily closes above about 1095. If that breakout should occur, a new tentative upside target is set from about 1099-1110. The top of the rising regression channel waits above but that's an untested upside target. The RUT has not been reaching the top of the channel before pulling back these last few months.

If the currently being tested Keltner and congestion-zone resistance should roll the RUT lower again, we can't be sure that the red 9-ema will provide any support this time. However, bulls would like to see it do so on daily closes, then bouncing the RUT higher again. If the RUT instead drops through the 9-ema on sustained daily closes, the Keltner setup suggests a next potential downside target from about 1038-1055. That's a rather wide target but a number of potential support levels converge there.

If that support should fail, however, on sustained daily closes, the next potential downside target is now at 1014-1025. A lower potential downside target is also marked in case that support should fail.

Annotated Daily Chart of the Dow Jones Transports:

Once again, our bellwether index isn't being much of a bellwether these days. It's confirming the actions of the other indices with no divergence yet. So far, it's telling us not to be too distrustful of what we're seeing on the other indices, but today's rather modest gain has me at least watching closely. That's not much of a divergence yet, though.

Tomorrow's Economic and Earnings Releases

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

Current FOMC Chairman Ben Bernanke was scheduled to speak in Mexico City at the Bank of Mexico conference at 8:00 pm CT tonight. With his leadership now moving toward its last months, I'm not certain how market moving his statements might be.

Important companies announcing earnings tomorrow include C (BMO), DPZ(BMO), YHOO (AMC), INTC (AMC), and SCHW (BMO).

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

The SPX has been maintaining consistent 60-minute closes above the 60-minute 9-ema, with that support tested multiple times Friday and today. Now that the SPX is attempting to set a new potential short-term target at about 1723-1727, bulls want to see the SPX maintain support above that moving average on any other pullbacks. That average is likely to be in a range of about 1700-1705 if tested tomorrow until about midday.

If the SPX should sustain levels above the 1723-1727 level, the daily chart would need to be examined for next potential upside targets.

If the SPX falls beneath the red 9-ema or the 1700 level on sustained 60-minute closes, it may be vulnerable to a retest of the bottom of its smallest (grey) Keltner channel, likely to be located from about 1691-1696 by the time it could be tested. A sharp move lower, however, could drive it all the way to the next potential support level, the stronger configuration that stretches from about 1684-1690. A failure to hold consistent 60-minute closes above about 1684 sets up the next potential short-term downside target that is likely to be between 1666-1673 by the time it is tested. A failure there targets last week's low.

Annotated 60-Minute Chart of the Dow:

The Dow has also set up a short-term pattern of finding support on 60-minute closes on a rising red 9-ema, and it's set a new potential upside target, a pattern that bulls want to see continued. There's been a bit of spikiness to the 60-minute candles on both the SPX and Dow, so that the clearing of resistance doesn't look as strong as it might. As long as 60-minute closes are maintained at or above about 15200-15242, however, the Dow maintains its current potential upside target of 15450-15490.

Sustained 60-minute closes beneath about 15200, however, set a new potential downside target from about 15073-15126. A drop is likely to drive the grey channel's lower boundary into that zone, too. If that zone is tested and support is found there, bulls would want to see the Dow quickly bounce back above the red 9-ema.

If the Dow instead sustains 60-minute closes beneath about 15073, it sets a new potential downside target at about 14900-14945. A failure to find support at that level likely targets last week's low although potential support might be found as high as about 14785. If prices blow through last week's low, look to the daily chart for next targets.

Annotated 60-Minute Chart of the NDX:

Somewhat surprisingly, the NDX's strong rebound has not sustained 60-minute closes above the level that would set a new potential upside target, with the top of the current resistance likely at about 3256-3265. If the NDX can sustain 60-minute closes above about 3265, it sets a new potential short-term upside target from about 3297-3305.

The NDX, too, has been sustaining 60-minute closes above a sharply rising 60-minute (red) 9-ema. However, that moving average may not be particularly meaningful to the NDX's pattern. If may be more important that the NDX sustain 60-minute closes at or above the zone that extends from about 3204-3214, with the grey channel's lower support zone likely driven close to that zone, too, on any decent short-term drop.

A failure to sustain 60-minute closes above about 3204 sets up a potential short-term Keltner target of 3167-3175. Sustained 60-minute closes beneath that would likely target last week's low.

Annotated 60-Minute Chart of the Russell 2000:

Sustained 60-minute closes above about 1083 maintain the RUT's potential upside target of 1094-1098, although too much time spent lingering around 1083 would begin to call it into question. Sustained 60-minute closes below about 1083 set up a new potential short-term downside target near 1075-1079. Sustained 60-minute closes beneath that target potential support near 1068-1073 at what could be important potential support.

Sustained 60-minute closes beneath about 1068 targets 1058-1061, although it's possible that support could be driven much lower by a quick or long-sustained RUT move down through those other various support levels. Below that, the RUT perhaps targets last week's low.

What do I think? We can conclude from today's bounce after the lower open that market participants want to drive prices up and front run any post-solution bounce. But are some of those market participants big-money people who want to sell into any advance? So far, we're not seeing anything other than what we saw when markets bounced in April, June, and early September. Volume is light, though, so we don't know if big money is actively participating in the gains. The indices bounced from analogous support zones, and they ran quickly up through their red 9-ema's. The transports do not yet show any divergence from this action except in the little detail that its gains were modest in comparison to some others.

The contrarian nature in me makes me distrustful and thinking of the old buy-the-rumor, sell-the-fact axiom, but I have nothing on which to hang that distrust except the increasing volatility in the markets, which worries me, and the low volume, which I think is expected with this kind of uncertainty.

As of this writing, we do not have a solution that will turn October 17 into just another trading day, and I've just read that Senate Republicans are now scheduled to meet tomorrow at 11:00 am. Remember to think about what you can afford--financially or mentally--to risk in the markets and make decisions based on what's right for you, not other traders. A failure to find a solution would certainly disturb markets, but so would a solution quickly followed by earnings reports that dismay. For now, there's no sign of any of that, but I don't personally feel it's time to relax just yet. Watch the levels marked on the charts for guidance.

Linda Piazza