Market Internals

Introduction

When scanning charts of the major U.S. indices during the trading day today, I noted a tale of two markets. Some indices and futures produced small-bodied candles indicative of indecision. Some indices followed Friday's gains with robust bounces. Until the last few minutes of the trading day, indecision appeared to dominate charts. However, I've learned to pay attention when the RUT and Dow Jones Transports diverge from other indices, just in case. By the end of the day, some of the candles indicating indecision looked much more robust.

The SPX gained 0.36 percent; the Dow, 0.15 percent; and the NDX, 0.15 percent. The RUT zoomed higher by 1.16 percent, but the SOX dropped 0.14 percent. Volatility indices dropped. Financials as represented by the KBW Bank Index (BKX) dropped 0.09 percent. Homebuilders as represented by the Dow Jones U.S. Home Construction Index (DJUSHB) gained 1.14 percent, among the strongest gaining sectors today.

Metals were mixed. Gold futures (/GC) for December delivery settled at 1314.70, up 1.5 points. Volume was far lighter than Friday's volume. Some market participants speculate that holidays in Asia and upcoming important economic developments in China and the U.S. contributed to lighter-than-normal volume in some metals. Silver futures (/SI) for December delivery settled at 21.70, down 0.137 points, also on light volume. Copper futures (/HG) for December delivery settled at 3.2530, down 0.0455 points, on volume that was higher than Friday's.

Light sweet crude futures (/CL) settled at 94.62, up 0.01. Volume was light. Earlier, these futures had hit a multi-month low after Libya announced that exports from two ports would resume.

Monday's Developments

Last night, several Asian bourses were shuttered for holidays. That included the Nikkei 225, closed for Culture Day. The Straits Times was also closed last night.

China's non-manufacturing PMI was at a fourteen-month high, at 56.3. The Hang Seng dropped 0.26 percent, but China's Shanghai Composite gained 0.07 percent.

Across Europe, most manufacturing PMI numbers either disappointed or met expectations. Only the U.K.'s construction PMI exceeded expectations. However, the less-watched Eurozone's Sentix Investor Confidence jumped to 9.3, well above the expected 9.3. In addition, investors liked HSBC's (HBC) earnings, with the gains supporting the FTSE 100's climb.

European bourses were ready today to bounce along with U.S. gains. The FTSE 100 gained 0.43 percent; the DAX, 0.33 percent; and the CAC 40, 0.36 percent. Spain's IBEX 35 gained 0.36 percent, and Italy's FTSE MIB, 0.76 percent.

In the U.S., the day's allotment of economic releases began Moody's weekly Business Confidence Survey. Business confidence dropped for another week, slipping to 26.8 from the prior 27.5. Moody's still believes that the government impasse last month did not strongly impact business confidence, and the firm terms business sentiment "sturdy." About two-thirds of respondents still believe the economy will improve early next year, and current sentiment measures at levels "consistent with an economy that is expanding near its potential," the firm said. The headline number changed, but Moody's interpretation remains the same.

Gallup agreed with Moody's in its assessment that the political wrangling last month had negligible impact on sentiment. The Gallup U.S. Consumer Spending Measure saw spending averaging $88 per day, an increase from September's $84 per day. This October's average daily spending was the highest for any October since 2008, Gallup said. This relatively new report consists of self-reported consumer spending based on individual reports gathered from a random sampling of Americans.

However, not all commentators believed that the results were upbeat and said the impact of the political wrangling was seen. They interpreted the data differently. Also, Gallop's upbeat comments ended there. Gallup said the although the Gallup index rose from its -39 during the height of the political wrangling, it still measured a strong negative at -30. That negative remains well below the summer's single-digit-negative readings.

The Gallup release was followed by U.S. Factory Orders. The 1.7-percent gained was less than the expected 1.9 percent gain. Shipments, unfilled orders, and inventories all increased. However, when transportation was stripped out of the headline number, new orders fell 0.2 percent. Orders for transportation equipment had jumped 12.9 percent and had driven the increase in the overall headline new orders. Transportation had also led the increase in unfilled orders.

Shipments were up four of the last five months, the U.S. Department of Commerce said. Led by shipments of computers and electronic products, shipments of manufactured durable goods had measured the highest level since measurements began being made on a NAICS level, the Commerce Department said. However, shipments of manufactured non-durable goods decreased. Shipments of coal and petroleum products led the decrease in non-durable goods.

Unfilled orders rose seven out of the last eight months, and inventories, nine of the last ten months. Inventories also measured their highest levels since the series employed a NAICS basis for reporting the number, the Department of Commerce said, with transportation equipment also leading that increase. Manufactured non-durable goods again showed a different pattern than durable goods, with declining inventories of coal and petroleum products leading the decrease. The unfilled orders-to-shipments ratio increased to 6.39 from August's 6.36, and the inventories-to-shipments ratio rose to 1.30 from the August 1.29.

August data, delayed for 32 day, was released concurrently with the September information. The August -0.1 percent reading was a disappointment, with the number predicted to be a positive 0.2 percent gain.

This morning, St. Louis Federal Reserve President James Bullard spoke on talk TV. He sees signs of progress in the labor market but also said that he'd like to see two-percent inflation before tapering. Inflation is now running about one percent, so he's still patient. He warned that any decisions about tapering would be data dependent and would not be dependent on political stability. Although he's patient, I don't think he thought the FOMC could wait that long. (That's my weak attempt at humor.)

Shortly after noon, FOMC Reserve Governor Jerome Powell addressed the Federal Reserve's Asia Economic Policy Conference in San Francisco. He is a current voting member, through January 2014. Apparently, he was feeling patient, too. He said that there was not yet a clear date for tapering bond purchases. In words that echoed many a FOMC statement, he said that monetary policy would probably remain "highly accommodative for some time." He believes that tapering can be accomplished without disruptive overall macroeconomic effects. Interest rates, capital flows, and asset prices in EMEs will likely be impacted, along with other effects.

FOMC Federal Reserve Bank of Boston President Eric Rosengren spoke late this afternoon, addressing the University of Massachusetts, with audience questions expected. In early reports from his address, Rosengren also mentioned the "patient" word. He is a voting member this year who has supported the asset-purchasing program. He indicated that he believes postponing the taper from December to April would not greatly increase the Federal Reserve's balance sheet. He does believe that the economy is gradually improving.

I did not see Dallas Fed President Richard Fisher on the speaker schedule, but some news sources report that he spoke in Sydney. While there, he did not sound as patient as the other FOMC members speaking today. He suggested that tapering could come sooner than some anticipate. He believes the decision should be based on what's appropriate for the economy even if there are fiscal risks resulting from those decisions.

Today, Iran's President Rouhani expressed concerns about nuclear talks, saying he is not optimistic with the Western world. Sunday, Ayatollah Ali Khamenei had said that he was not optimistic about the talks since he does not believe they will produce the results that Iran expects, but he said that he supports those talks anyway because the talks cannot hurt the country.

Story stocks include Blackberry (BBRY, 6.49, down 1.28 or 16.41 percent). Today was the deadline for Fairfax to submit a bid for the company. The stock at first traded higher in pre-market trading in anticipation of an announcement. However, before the open, newspapers began reporting that the company would abandon its sales plan and replace its CEO. Fairfax Financial Inc. would not be taking the company private. Reportedly some board members will be leaving, too, and the company will prepare to raise $1 billion in capital. Futures dropped a hefty percentage and so did prices after the open.

Companies reporting earnings today included CME Group Inc. (CME, 73.82, down 0.88 or 1.18 percent). The company reported increased demand for over-the-counter interest-rate swap clearing. Average daily trading volume rose to 12 million contracts, a gain of 11 percent. Clearing and transaction fee revenues rose 6 percent from the previous quarter. Adjusted earnings number $0.75 per share against expectations of $0.73 per share. Revenue was $714.6 million, in line with expectations.

Kellogg Company (K, 62.72, up 0.43 or 0.69 percent) reported earnings of $0.95 per share, above the expected $0.89 per share. Revenue was $3.72 billion, just shy of the anticipated $3.73 billion. For the full year, the company expects adjusted earnings in the lower end of a previously announced $3.75-3.84 billion range. The company expects sales growth for the fiscal year at 4-5 percent. The company announced that it would cut seven percent of jobs.

Alcatel-Lucent, S.A. (ALU, 3.86, down 0.03 or 0.77 percent) wants to finance a turnaround plan and cut debt. The company will sell high-yield bonds in the amount of $750 million and also intends to implement a new syndicated revolving credit facility. Holders of the company's existing ordinary shares will have preferential subscription rights.

Achillion Pharmaceuticals, Inc. (ACHN, 2.71, up 0.18 or 7.11 percent) announced that its potential drug for the treatment of chronic hepatitis C viral infection, ACH-3422, advances toward clinical studies.

Johnson and Johnson (JNJ, 93.03, down 0.34 or 0.36 percent) will settle a suit with the Justice Department by paying about $2 billion, the company said today. That suit involved the marketing of Riperdal, and antipsychotic drug.

Canadian Solar (CSIQ, 28.65, up 3.09 or 12.09 percent) scheduled its earnings announcement for November 13. The company said solar module shipments of approximately 460-480 MW will beat the original guidance of 410-430 MW. Gross margins of about 18-20 percent should also exceed the original guidance of 10-12 percent. The company expects GAAP earnings to show a profit.

Twitter Inc. (TWTR) boosted its IPO price range to $23-25 per share from the prior $17-20 per share. The company plans to sell 70 million shares. As of this writing, the IPO is still scheduled for Wednesday. Also, IBM has filed a lawsuit claiming that TWTR violated its patents.

Anadarko Petroleum (APC, 95.93, up 1.54 or 1.63 percent) reported earnings, excluding one-time items, of $1.13 against expectations of $1.16. The company said revenue was $3.85 billion, more than the anticipated $3.82 billion. Offshore sales volumes rose 61,000 boe per day. It was rumored today that the company might sell its stakes in China oil and gas projects. As this report was prepared, the stock has slipped $1.98 or 2.06 percent from the day's close. After-hours trading can be volatile, however, and does not always predict the next day's trading behavior.

Office Depot (ODP, 5.68, down 0.09 or 1.56 percent) and OfficeMax (OMX, 15.30, down 0.20 or 1.29 percent) were due to produce earnings results this afternoon. Those results were not yet available as this report was prepared. Last week, the planned merger of these companies was cleared by the Trade Commission.

SAC Capital Advisors will likely pay $1.8 billion to settle claims relating to an insider trading investigation. That amount includes a $616 million penalty the company had already agreed to pay this year. The company will also likely plead guilty, prosecutors have said. The deal has to be approved by a judge. The founder of the fund is Steven A. Cohen. Although Mr. Cohen has not been charged with any criminal wrongdoing, it is not yet known whether he will be subject to an SEC administrative action that charges that he didn't adequately supervise employees.

Shareholders in Bank of America (BAC, 14.04, up 0.02 or 0.14 percent) had brought a lawsuit related to AIG disclosures. Shareholders claimed that BAC was concealing a $10 billion suit brought by AIG, with AIG accusing BAC of misrepresenting the quality of mortgage-backed securities that BAC and its various units had sold to AIG. BAC shareholders also claimed that BAC hadn't revealed the scope of potential losses related to the case. Today, newswires announced that U.S. District Judge John Koeltl in Manhattan dismissed the lawsuit, saying that BAC had no duty to disclose the information and that the news did not differ materially from information the bank had previously disclosed.

Kohl's Corp. (KSS, 58.47, up 1.62 or 2.85 percent) was upgraded. An analyst with UBS cited the retailer's shift back to name brands when raising the rating to a "Buy" rating from the previous "Neutral" rating.

Some airlines were in the news. Included were American Airlines (parent company, AAMRQ, 9.84, up 1.94 or 24.56 percent) and US Airways Group, Inc. (LCC, 22.71, up 0.27 or 1.20 percent), two companies with a proposed merger agreement being considered by the Justice Department. The department suggests that the two should consider divestitures at some U.S. airports as condition for dropping the lawsuit that proposed to stop the merger. This is a gambit for a settlement ahead of the November 25 trial.

Ryanair Holdings PLC (RYAAY, 45.62, down 4.72 or 9.38 percent) warned today that its full-year earnings would be $675-700 million rather than the prior expected $770-810 million. The company cited a hot European summer, a strike of French air traffic controllers and currency issues that kept would-be travelers at home. The company also said that those selecting seats at least 24 hours in advance would receive allocated seating.

In after-hours trading, CF Industries (CF, 217.63, up 2.69 or 1.25 percent) dropped after the company reported earnings. As this report was typed, the stock was last down 4.63 or 2.13 percent off the day's close. Lower nitrogen sales and prices hit resulted in lower profit.

The daily candles did not look the same on the various indices. Let's look.

Charts

Those new to my Monday Wraps might find the following 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:

Most of the day, the SPX appeared to be producing a small-bodied candle just above support. It was indicative of indecision ahead of other developments this week. However, in the last few minutes, the SPX's gain lent a more robust appearance to its daily candle. It was a solid bounce off support, although not one that has yet produced a new intraday or closing high.

Last week's late retreat brought the SPX down to retest support at the red 9-ema and the top of the rising regression channel. This was, then, a retest of the breakout level. So far, that retest has been successful, although today's candle did not build on the support as much as bulls might have preferred. The SPX needs to continue through with more gains tomorrow or its pattern suggests that some caution should be applied when deciding how much faith to put in current upside targets.

With that caution in mind, let's look at the potential upside target. As long as the SPX is forming consistent daily closes above about 1760, it's affirming its breakout status and its next potential upside target from about 1776-1795. Even sustained closes above about 1748 would officially maintain that upside target, although the breakout status would be questioned. Unless the SPX could then quickly break back above last week's high, bullish hopes would need to be tempered if prices are dipping as low as 1748 on daily closes.

Sustained closes below 1748 set a potential downside target from about 1730-1742. On a downdraft that occurs over the next couple of days, any potential support would likely be driven toward the bottom half of that range.

A failure to hold support above 1730 on sustained daily closes targets a potential downside target near 1709-1721. If the SPX should bounce from that zone after a retest, it's still maintaining prices in the upper or more bullish half of its rising regression channel. Bulls should be cautious about profits as the top of that channel is approached again if the SPX has visited 1709-1721 before bouncing.

A failure to maintain support on daily closes at about 1709 means that the SPX is falling through to the lower or less bullish half of its rising regression channel. In that case, traders should prepare for the possibility that the SPX would then drop all the way through to the bottom half of its rising regression channel and perhaps all the way to the important Keltner configuration likely to be at about 1660-1674. This is the "must hold" level for daily closes if the SPX is to maintain its prices roughly within the rising regression channel. Failure to hold those 1660-1674 on daily closes might do psychological damage to investor confidence and to short-term bullish trading plans.

Annotated Daily Chart of the Dow:

Like the SPX, the Dow retested its rising red 9-ema last week. It's so far been holding that support on daily closes. However, unlike the SPX, the Dow has not broken out of its medium-sized (purple) Keltner channel. It has so far been stalled at potentially strong resistance on daily closes from about 15663-15800. The Dow needs to sustain daily closes above 15800 before it sets the next new potential upside target. That target is currently at about 16067-16200.

So far, that just-overhead resistance is stalling the Dow's advances. If the Dow rolls over and falls through about 15476 on sustained daily closes, it sets a new potential downside target from about 15294-15415. If the Dow should decline that far and then bounce, watch for potential resistance at the 9-ema and then near last week's high.

Sustained daily closes beneath about 15294 set up a new potential downside target near 15072-15200 or perhaps even 14834-14991. Sustained closes beneath 14800 would be psychologically damaging to investor and trader confidence and would set up that next-lower potential target that is marked on the chart.

Annotated Daily Chart of the NDX:

The NDX's daily candle was also a small-bodied one indicative of indecision. Even a late-day bounce did not change it into a more robust candle.

The NDX has been maintaining daily closes above the red 9-ema and also above potential support that now groups from about 3344-3374. Potentially strong resistance also groups closely overhead, at about 3400-3438. The NDX has so far not been able to make much progress when pushing against that resistance. If it doesn't soon make that progress, it risks falling through 3344 toward the next potential downside target, likely at about 3300-3332 by the time it could be tested. A sharp or sudden decline would push potential support toward the lower end of that zone.

A test of that 3300-3332 zone and then a bounce should be watched closely when the red 9-ema is retested. That moving average could then be strong resistance on daily closes rather than strong support.

A fall through 3300 on sustained daily closes would set up a potential downside target near 3249-3280. A failure to maintain daily support near 3249 would mark a change in tenor for the NDX and would set up a potential new target from about 3122-3164. That's a must-hold region if the NDX is going to maintain prices within its rising regression channel. A lower potential target is also marked in case the NDX doesn't hold its must-hold level.

Annotated Daily Chart of the RUT:

The RUT's strong green candle indicates the type of bounce bulls want to see after a support test.

Late last week, the RUT dropped down to test the midline support of its rising regression channel. Today it continued the bounce from that support test up to and through the red 9-ema. Sustained daily closes above about 1108 would suggest that the RUT is managing to break back above the descending red 9-ema, and is setting up a new potential upside target from about 1114-1125 where it would be right back into last week's congestion zone. Today, of course, the RUT closed minimally above that 1108 zone, but that's a one-day close only cents above that level.

Sustained daily closes above about 1125 set up the highest marked potential target on the chart, at the top of the rising regression channel. That's currently at about 1136-1148.

However, sustained daily closes beneath about 1095 set up a potential lower target near 1068-1083. That 1068 level could be an important one to hold. A failure to hold that 1068 level on sustained daily closes sets up a potential retest of the bottom of the rising regression channel. Strongest support there might be found near 1035-1047. That's a must-hold level for the RUT to avoid setting the much-lower potential downside target marked on the chart.

Annotated Daily Chart of the Dow Jones Transports:

Last Monday, I mentioned that the Dow Jones Transports' chart suggested that this index could fall as far as 3-4 percent to retest support. As of Thursday's intraday low, that decline was a less-steep 1.86 percent before the transports promptly began bouncing into today's new high. That bounce again brought the transports into contact with potentially strong resistance. Will the tested potential resistance--at the outer boundary of the widest Keltner channel--stall the transports' climb as it did just a week ago or will the transports break out again? Watching which result occurs may tell us something about the next direction on other indices, particularly the Dow, SPX and OEX. It may even give us some insight into how willing momentum traders are to hold onto bullish trades even as new highs are reached. The attitude of momentum traders is of course important when watching indices such as the RUT and NDX, and we had mixed evidence on those two today.

Tomorrow's Economic and Earnings Releases

Some overseas developments should perhaps be noted, so they were included on this chart. For example, in the wee hours of the morning, the Bank of Japan's Governor Kuroda will speak. His statements have sometimes roiled the currency markets, which in turn have moved equity and commodity markets. In addition, the EU makes Economic forecasts tomorrow morning, about 6:00 am ET.

Later in the week, both the Bank of England and the ECB will announce rate decisions. Both occur Thursday morning, with the ECB then holding a press conference.

Many companies' earnings still fill up the reporting schedule tomorrow, but the names found on those lists are perhaps not as market-moving as the ones we have seen in the last two weeks. Those who would like to see the list of reporting companies can find it here.

Of course, not to be forgotten among the events is Twitter Inc.'s (TWTR) upcoming IPO, still scheduled for Wednesday as of this writing but also perhaps already impacting overall market sentiment.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

By Friday afternoon, the SPX mostly resumed its pattern of finding support on 60-minute closes above a rising 9-ema. Traders can watch this pattern for information about whether the short-term trend, a bounce from tested support, continues or begins to weaken. As long as that trend continues, watch for the possibility that the SPX will reach toward next strong resistance, now spanning from about 1771-1778. It's possible that closer resistance, at about 1766-1770, will continue to pressure the SPX, and that's not a good thing for short-term bulls if it continues. In the strongest climbs, rising prices push this particular Keltner channel line up into the next stronger resistance pattern.

Sustained 60-minute closes beneath about 1758 would set up a potential short-term downside target at about 1741-1749. Short-term bulls want to see support hold on 60-minute closes above about 1741. If not, the SPX sets up a potential short-term target near 1707-1714.

Annotated 60-Minute Chart of the Dow:

By Friday afternoon, the Dow had also resumed its pattern of finding support on 60-minute closes mostly at or above its 9-ema, but it's a bit early to call that a strongly rising 9-ema just yet. That observation questions the potential upside target near 15676-15717 and maybe even the interim one at 15637-15666. However, if the Dow can push up to and then through 15717 on sustained 60-minute closes, it sets a new potential upside target near 15756-15800. The look of the Dow's 60-minute chart doesn't inspire particularly bullish hopes, but we also must remember the example of this index's bullish sister index, the Dow Jones Transports.

If, instead of climbing through resistance, the Dow should roll down from current levels or nearby resistance, sustained 60-minute closes beneath about 15572 would set up a potential downside target near 15450-15500. A failure to hold support above 15450 on sustained 60-minute closes sets a new downside target near 15128-15180.

Annotated 60-Minute Chart of the NDX:

What happened to this index that was outperforming to the upside? It no longer is, as is evidenced by the appearance of this chart. The NDX has been chopping sideways since Friday afternoon. The NDX looks almost as likely to fall toward 3334-3348 as it does to climb toward 3385-3400 or even 3408-3423. If it drops toward 3334, NDX bulls want to see that support hold. Sustained 60-minute closes beneath about 3334 would set a new potential downside target near 3253-3264.

Annotated 60-Minute Chart of the Russell 2000:

The RUT bounced hard off its weekly low on Friday, continuing that bounce today. While we can see that 60-minute closes have been above that a sharply rising 9-ema, the RUT didn't deign to even drop into a 9-ema retest today. As long as it maintains 60-minute closes above about 1104, it maintains a potential upside target near 1114-1119. Sustained 60-minute closes above about 1119 set up a new potential upside target near 1124-1128.

The price pattern suggests, however, that it's time for a 9-ema retest. Like a recalcitrant child, the RUT doesn't always pay attention to suggestions, of course. However, if the RUT does drop into a 9-ema retest, it would also be testing significant round-number and other Keltner support near 1100. Sustained 60-minute closes below about 1099 suggest that the support isn't holding. In that case, a new potential downside target near 1093-1097 is set.

Keltner channels suggest that sustained 60-minute closes beneath about 1093 set up a new downside target near 1074-1079, and that the drop between 1093 and that new downside target could be swift. However, we can't ignore the potential support at last week's 1087.09 low. Unless prices slice straight through that level, would-be buyers could certainly be waiting there.

The RUT did its best to lead other indices higher today, as did the Dow Jones Transportation Index. Many other indices were reluctant participants in the day's gains, however, and the SOX didn't participate at all. Conspicuously absent from the list of indices on a momentum run was the recent momentum-leader, the NDX. Is it time for prices to pause or is there another momentum run higher through and maybe out the top of rising regression channels? Maybe we should look to the transports and, more particularly, the RUT to give us a clue tomorrow. I've indicated appropriate levels to watch.

Linda Piazza