Market Internals

Introduction

To begin where I should begin today, thank you, Veterans, for your service.

Market participants seemed to be using this bank holiday to catch a breath today, recovering from two preceding trading days of strong but opposite moves. Trading was subdued in the major indices, producing a number of small-bodied candles indicative of either indecision or perhaps, in this case, exhaustion after the previous two days. Despite those small-bodied candles, however, the Dow managed another new high.

The Dow was alone among the major indices in hitting new highs. However, the SPX gained 0.07 percent, and the Dow, 0.14 percent. The NDX declined 0.11 percent, and the SOX, 0.12 percent. The RUT gained 0.14 percent.

Bond markets were closed for Veterans Day today. Metals were impacted by the recently stronger dollar. They were also impacted by uncertainty about tapering here and the political and economic path in China ahead of the conclusion of an ongoing several-day political planning meeting. Gold futures (/GC) for December delivery settled at 1281.10, down 3.5. Silver futures (/SI) for December delivery settled at 21.281, down 0.035. Copper futures (/HG) for December delivery settled at 3.2595, up 0.0055.

Several geopolitical developments may have impacted trading in the energy complex today. This weekend, negotiations with Iran stalled although the participants agreed to talk again on November 20. Today, Iran announced that it would allow the United Nations to expand its monitoring of the country's nuclear sites. That would include a new reactor and an important uranium mine. Currency moves and those Iran talks hit the energy futures early in the day. Light sweet crude (/CL) for December delivery fell at first, but after the dollar weakened, it settled at 95.14, up 0.54. Brent prices rose even when light sweet crude was falling due to the stall in negotiations in Iran.

In addition to that political development relating to Iran, another occurred. The Syrian National Coalition agreed to peace talks in Geneva but made several conditions. The opposition wants women and children released from Syrian jails and an easing of attacks on opposition-held areas as a pre-condition to meeting. They also do not want to participate if President Bashar al-Assad will have any part in a transitional government. Of course, President Assad has his own conditions, and those include banning anyone he considers terrorists from negotiations. This weekend, reports of outbreaks of polio in Syria began surfacing, with the danger that the epidemic could spread to neighboring nations.

Monday's Developments

Typhoon Haiyan exacted a horrifying toll in human deaths and structural damage in the Philippines. Even though it weakened from its early super-typhoon strength before hitting Vietnam, it took lives there, too.

Although some Asian bourses started out in negative territory and the Philippine Stock Exchange ended with a 1.4-percent loss, those bourses typically covered on this page had gained by the end of their trading day. The Nikkei 225, especially, benefitted from currency moves, with the dollar having strengthened against the yen after Friday's surprisingly strong non-farm payrolls. The Nikkei 225 gained 1.30 percent; the Hang Seng, 1.43 percent, and the Straits Times, 0.30 percent. China's Shanghai Composite gained 0.16 percent after a weekend report that showed the country's industrial production grew an annualized 10.3 percent in October.

After starting out in the red for the first moments of trading, European bourses posted gains today. The FTSE 100 gained 0.30 percent; the DAX, 0.33 percent; and the CAC 40, 0.70 percent. Spain's IBEX 35 gained 0.43 percent, and Italy's FTSE MIB, 0.77 percent.

Here in the U.S., Moody's weekly Business Confidence Index measured 26.4, dropping from last week's 26.8. The bullet points of Moody's summarization haven't changed in several weeks, however. The firm still assesses business confidence as being "consistent with an economy that is expanding near its potential."

At noon, President Jens Weidman of the Deutsche Bundesbank, with the central bank also known as "Buba," spoke in Basel. After last week's ECB move to lower rates, anything he might have said that impacted currency moves could impact the U.S., too. He reiterated his stance that in the Eurozone, government bonds should be backed by sufficient capital and be treated like other bonds or loans. Banks shouldn't focus on holding only the debt of their own country. His view does not appear to be shared by the ECB, and the euro/USD pair's trading pattern did not appear to be impacted around the time of his speech.

The ECB may have shrugged at Weidman's statement, and BNP Paribas thought it likely that the ECB would also shrug off its suggestion. BNP Paribas believes that the ECB should or "must" enact an outright bond-buying quantitative easing program. The firm said a program to buy 50 billion euros worth of government bonds a month would be about the right amount.

Story stocks today included Apple (AAPL, 519.05, down 1.51 or 0.29 percent). Bloomberg News broke a story today that speculated on the features of new iPhone models possibly to be introduced in the second half of next year, perhaps in the third quarter. Those models would have curved glass, larger displays and enhanced sensors. Samsung has already introduced Galaxy Round with a curved screen.

Amazon (AMZN, 354.38, up 4.07 or 1.16 percent)and the U.S. Postal Service are testing a new program in New York and Los Angeles for Sunday package delivery for customers eligible for free two-day delivery. If the program works out, the program would be expanded to other large cities.

Twitter, Inc. (TWTR, 42.90, up 1.25 or 3.00 percent) will be added to the Wilshire 5000. The stock will be added Friday, after the close, along with the stocks of Container Store Group (TCS, 34.24, down 0.71 or 2.03 percent) and Burlington Stores (BURL, 27.05, down 0.12 or 0.44 percent).

Whole Foods (WFM, 57.80, down 0.75 or 1.28 percent) investors must have winced this weekend when they learned that a recall of foods possibly contaminated with E. coli impacted products sold at Whole Foods along with Trader Joe's and Superfresh Foods sold at Walgreen Stores (WAG, 59.45, down 0.25 or 0.42 percent). After gapping lower on Thursday, WFM had steadied and gained Friday, only to be dropped back again today by this news.

Morgan Stanley removed Google (GOOG, 1010.59, down 5.44 or 0.54 percent) from its Best Idea List. The stock was kept at an overweight rating, but the analysts believed that the catalysts for outperformance have been exhausted.

Oil-and-natural-gas explorer Denbury Resources Inc. (DNR, 18.20, down 1.15 or 5.94 percent) initiated quarterly dividends of $6.25/share, the company announced yesterday. The program will begin in the first quarter. DNR also increased its stock buyback program. Today, the company was hosting an annual analyst day.

Silver and gold streaming company Silver Wheaton Corp. (SLW, 21.53, down 0.07 or 0.32 percent) reported (unaudited) earnings that met expectations while revenue disappointed. Silver equivalent production rose 17 percent year over year, and silver equivalent sales rose 52 percent over the same period, but average realized sale price per silver equivalent ounce fell 32 percent when compared to the year-ago levels. The company also announced a dividend of $0.09 per common share and mentioned changes to be made in contracts with Hudbay Minerals and Barrick Gold Corp (ABX).

Shire (SHPG, 135.33, up 0.93 or 0.69 percent) will acquire all outstanding shares of ViroPharma (VPHM, 49.42, up 10.04 or 25.50 percent) for $50.00 per share in cash under the terms of an unanimously approved merger agreement announced today. That's quite a premium over VPHM $39.38 closing price on Friday. SHPG will end its share buyback program in order to use its cash resources as well as existing and new bank facilities to acquire VPHM shares. SHPG wants to expand its rare-disease portfolio, with that goal driving this acquisition.

On this next item, I don't know whether I should lead with "Carl Icahn is back in the news" or "Transocean (RIG, 55.37, up 1.92 or 3.59 percent) made the list of story stocks." RIG, Carl Icahn and some of the investment funds managed by Icahn have entered an agreement. As a result of the agreement, RIG's board will introduce and support at the 2014 Annual General Meeting a $3.00/share dividend, the election of Vincent Interiera and reelection of Icahn Capital LP's Samuel Merksamer to its board of directors, and a reduction in the number of directors on the board. The Icahn Group will support the board's choice of directors in turn and will also support a possible recommendation for a Master Limited Partnership yield vehicle (MLP) to provide additional financial flexibility. The MLP would be offered the middle of next year.

After the close, Sotheby's (BID, 51.04, down 0.37 or 0.72 percent) reported earnings. BID was expected to report a loss of $0.47/share. The company reported a loss of $0.44 per share. Revenue was $107.9 million, higher than the expected $70 million. In its report, the company made clear that the third quarter is not indicative of the company's prospects and usually returns a loss since the art auction market is seasonal. This quarter typically represents only 7-10 percent of the company's annual sales. The company reports that the fourth quarter "is off to a remarkable start."

In addition, the company reported on its ongoing review of capital allocation and financial policies, in part driven by activist investors. Those investors have called for a shakeup among the company's executive lineup, among other changes they would like. As this report was prepared, BID was last up 0.96 or 1.88 percent from the day's close

News Corp. (NWS, 17.78, down 0.16 or 0.89 percent) declined after the close after reporting adjusted earnings of $0.03/share on revenue of $2.07 billion. Both missed expectations of $0.05/share on revenue of 2.18 billion. The stock was last down 0.52 or 2.92 percent from the day's close.

Medical imaging company Hologic, Inc. (HOLX, 22.90, up 0.86 or 3.90 percent) fell in after-hours trading after reporting adjusted earnings of $0.39 per share on revenue of $622.1 million and providing an update on expectations. Analysts had expected earnings of $0.37 on revenue of $624.4 million, but the outlook may have been the main problem. As this report was prepared, the price had fallen 1.69 or 7.38 percent from the day's closing value. The company said adjusted earnings for 2014 should be $1.32-1.38 on revenue of $2.43-2.48 billion. Experts had expected $1.63 per share on revenue of $2.56 billion.

Rackspace Hosting Inc. (RAX, 49.31, up 0.77 or 1.59 percent), a provider of cloud-based computing services, also dropped heavily in after-hours trading. As this report was prepared, the stock was down 3.88 or 7.87 percent from the closing value. The company's earnings of $0.11 per share on revenue of $388.6 million disappointed, with analysts expecting $0.15 per share.

Let's look at daily charts for the major indices.

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:

The SPX ended Friday and began today's trading at the top of a congestion zone, resistance that had held on daily closes over the last couple of weeks. On a Keltner basis, however, it was above a rising red 9-ema and also above other potential support on daily closes that extends up to about 1768. On that Keltner basis, it had set a tentative new upside target from about 1780-1800. The trouble with that setup was that, other than Thursday's sharp decline, the SPX had been maintaining that new potential upside target over the last two weeks and hadn't been able to make any progress toward achieving it.

Neither had the SPX continued lower after dropping toward the top of what was potential support on Thursday. The drop pushed the potential support zone lower, but the SPX did not continue lower. In cases such as these, all we can do is set up potential scenarios and watch for them to either unfold or be disproved.

Sustained daily closes above about 1768 still suggest a potential upside target from about 1780-1800, with presumed strong resistance being encountered as that zone is approached or entered. Closes between about 1754-1768 indicate churn without a clear direction to be determined by that churn. Sustained daily closes beneath about 1754 set up a potential downside target near 1720-1738, where presumed strong support might start kicking in.

If the SPX were to drop into the 1720-1738 zone and then bounce, watch for possible strong resistance to reassert itself at the location of the 9-ema, wherever it might be at that time. On the other hand, sustained closes beneath about 1720 set up a potential target near an important support zone at about 1667-1684. A failure to hold support at or above about 1667 on daily closes would be a break from a long-running pattern on the SPX. That break in pattern would signal that the SPX was breaking down out of its rising regression channel. A next potential downside target is also marked in case that should happen. Remember that this is not a prediction, but an if/then kind of scenario being discussed.

Annotated Daily Chart of the Dow:

Clearly, the Dow has been achieving new highs as it did again today. However, the Keltner channels provide a slightly different viewpoint of the Dow's action while making those new highs. The Dow ended Friday and began today without a new Keltner potential upside target being set. The Dow has been testing the potential resistance on daily closes that now extends up to about 15864. It's been climbing the underneath of its middle-sized Keltner channel, pushing the upper channel line higher without being able to break up through that dynamic barrier. According to Keltner evidence, the Dow would need to sustain daily closes above about 15864 before it's in breakout mode on this chart, thereby setting a new potential upside target of about 16160-16283. Can the Dow keep climbing toward that target without ever officially setting that new target? Of course it can, but that's not the most frequent setup.

The Dow began today looking as likely to pull back into another red 9-ema support retest as it was to break out, and vice versa. Support on daily closes might be found from about 15554-15657. A failure to sustain daily closes above about 15554 sets up a potential new downside target from about 15362-15480.

This particular support configuration found at 15362-15480 has not been important to the Dow the last few months, as the Dow has often crossed this moving average with some ease. However, we can still watch whether support tends to hold on daily closes above or below about 15362. Sustained closes below that set up the next potential target near 14982-15155. This particular configuration has represented particularly strong support for the Dow on sustained daily closes over the last several months. That's why it needs to hold this time if the Dow is to maintain its recent pattern of moves up and down through a wide rectangular band. On a Keltner basis, sustained daily closes beneath about 14982 set up the lowest potential downside target marked on the chart.

Although the Keltner channel setup shows that a break of daily support at about 14982 could see the Dow quickly tumble down to that lowest marked target, I would of course watch for potential support to kick in, at least temporarily, at the summer and fall lows. Unless the Dow just barrels through those support levels on volume, buyers are likely going to be willing to step in front of the proverbial trains and knives at those prior historical support levels if the Dow ever gets that low. If the Dow should tumble down to those summer and fall lows, however, and you're willing to attempt a circus act and step in front of falling knives or barreling trains, do so in less size than you'd like to do it, just in case the knives and trains keep coming.

Annotated Daily Chart of the NDX:

The NDX ended Friday and began today with prices jammed against the red 9-ema and the bottom of a potential resistance zone that extends up to about 3390. Until the NDX is able to sustain daily closes above about 3390, it has not yet set a new potential upside target. That target would currently be at about 3406-3438. That's not far from the resistance level that marks a breakout.

Sustained daily closes beneath about 3360 would set up a potential retest of last week's low and perhaps a tumble down as low as about 3383 before potential support on daily closes kicks in.

If that 3383-ish support is tested and does not hold on consistent daily closes, the NDX sets a new potential downside target near 3143-3181. It's important to NDX bulls that the 3143-3181 potential support hold on sustained daily closes. Not holding that support would mean that the NDX is breaking down through the lower boundary of the rising regression channel. That action would set a new potential downside target near 2900, with the potential target marked on the chart.

Annotated Daily Chart of the RUT:

Like the NDX, the RUT ended last week and began this week testing potentially strong resistance on daily closes. In the RUT's case, that potential resistance zone extends up to about 1109. Unless the RUT can sustain daily closes above about 1109, it has not set the next potential target, now at about 1120-1130.

The Keltner setup reveals that, unlike the SPX and Dow, the RUT is not challenging the upper boundary line of its middle-sized (purple) Keltner channel. The RUT is no longer outperforming on a Keltner basis, and that's a concern since the RUT often leads in strong rallies.

Sustained daily closes beneath about 1196 set up a downside target that would constitute a retest of last week's low. Potential support on daily closes could kick in from about 1071-1083. A failure to find support on daily closes above 1071 sets up an important target at about 1040-1052. That's an important Keltner configuration for the RUT as well as representing the support at the bottom of the RUT's rising regression channel, too.

A failure to find support on sustained daily closes at or above 1040, then, represents a breakdown out of the RUT's rising regression channel. In that case, a new potential downside target would be set at about 950-969. Traders should of course also watch for the possibility that, on the event of a sharp tumble lower, adventurous buyers might step in at recent swing lows, such as the one from September 3 at 1009.

Annotated Daily Chart of the VIX:

Although I typically put the Dow Jones Transports chart in this space, the VIX is again dropping into levels that make it imperative that we think about the implications. While the VIX can go much lower and stay lower, as it has in the past, we must realize that the VIX is now at or approaching levels from which it often reverses. Those reversals typically occur during equity market pullbacks. It's time to put the volatility indices on your radar screen, if you haven't already.

The volatility indices are not great market-timing tools, and I'd be the last one to tell you that this approach to typical reversal zones means that the VIX and equity markets are definitely going to reverse. Those of us who were actively trading in 2004-2006 will never forget that the VIX can go lower and stay lower for years. However, when the VIX and other volatility levels sink into levels from which they often reverse, it's time to edit your trading plans. Is it time for a cheap OTM put to be added as a volatility hedge to your iron condors or butterfly trades? Is this really the right time to double the size of your typical trade? If you've never done so previously, is it time to talk to your broker about some put protection on your long-term trades? Each of us will have different answers. What you don't want to do is go crazy shorting stocks or loading up on puts, not in these sometimes strange market conditions. Shorts have fueled some of our biggest equity morning gaps some of these trading days.

Tomorrow's Economic and Earnings Releases

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

In addition, a number of FOMC members will be speaking tomorrow. After last week's surprisingly strong non-farm payrolls and ahead of U.S. Federal Reserve Vice Chair Janet Yellen's testimony before the Senate Banking Committee on Thursday and then her nomination, their speeches will be analyzed for hints about taper announcements. Dallas Federal Reserve President Richard Fisher will be speaking in Melbourne, Australia, at 3:00 am ET. He speaks about monetary policy and growth. He will be a 2014 voting member of the FOMC.

Minneapolis Federal Reserve Bank President Narayanna Kocherlakota speaks in St. Paul at 1:00 pm ET. His speech also centers on monetary policy strategy. He will be a 2014 voting member of the FOMC.

At 1:50 pm ET, Atlanta Federal Reserve Bank President Dennis Lockhart speaks in Montgomery, Alabama. He speaks about the economic outlook.

It's probably also important to note that China's Third Plenum, a major political meeting intended to hash out government policies for the next decade, has been underway. That meeting will conclude Tuesday.

A schedule of companies reporting earnings tomorrow can be found here.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

The SPX jumped up a few points this morning then leveled off. It maintained 60-minute closes above its red 9-ema, but that 9-ema began flattening, not a particular sign of strength. Nominally, the SPX has set a potential short-term upside target at about 1778-1786, where next presumed strong resistance on 60-minute closes may lie. However, it looks almost as likely to drop toward 1762-1766 as it does to climb to that next short-term upside target.

If the SPX should form consistent 60-minute closes beneath 1762, however, it may be headed into a retest of last week's lows. The Keltner channel setup suggests that it might find support at a Keltner configuration now ranging from about 1748-1753, but those channel lines may be pushed lower, closer to last week's low, by a strong decline. Therefore, I would use consistent 60-minute closes beneath 1748 and a move below 1746 that isn't quickly reversed as a signal that the SPX could be setting the next potential downside target. That target is now located at about 1718-1724.

Annotated 60-Minute Chart of the Dow:

The Dow did set a new potential upside target from about 15797-15858 and also hit the bottom of that target this morning. The potentially strong resistance on 60-minute closes at that target kicked in and thwarted further advances. As long as the Dow finds consistent 60-minute closes at or above about 15767, it maintains that potential upside target and may keep challenging the resistance. Consistent 60-minute closes under about 15736, however, suggest the Dow could fall back to about 15685-15712.

Consistent 60-minute closes beneath 15685 suggest that the Dow could tumble back to potentially strong support now located from about 15544-15592. The potentially strong Keltner support is also joined by short-term historical support in that area, too.

A failure to hold support on 60-minute closes at or above about 15544 sets the much lower potential target at 15247-15305, according to Keltner evidence. However, if the Dow does start breaking down, would-be bears should also be aware of that potential support near last week's 15522.18 intraday low. It's possible that some bulls would be willing to step in again at that level.

Annotated 60-Minute Chart of the NDX:

The NDX traded sideways in a narrowing range today, indicated by those squeezed-between-support-and-resistance 60-minute candles. Moves between about 3348-3374 will no longer be particularly indicative of next direction, unfortunately. Sustained 60-minute closes at or above 3374 or a strong breakout above that level that isn't quickly reversed may set up the next potential short-term upside target at about 3393-3406, where resistance might again kick in. Be aware of rollover potential at that level. It would take sustained 60-minute closes above 3406 to set the next potential upside target, which might get pushed closer to 3440 on a strong upward move.

It would take sustained 60-minute closes beneath about 3348 or a strong breakout beneath it that isn't quickly reversed to set the next target from about 3318-3335. Keltner and short-term historical support converge in that zone, but if that's not enough to bounce the NDX, the next potential downside target is also marked. That ranges from about 3260-3272.

Annotated 60-Minute Chart of the Russell 2000:

The RUT has set a potential upside target of about 1110-1113, but it certainly couldn't make much progress toward that target today. As long as 60-minute closes are maintained at or above about 1098, the RUT maintains that upside target, but it needs to quickly make progress toward that target now or short-term bulls will get worried and bail.

If the RUT heads higher, watch for potentially strong resistance to kick in at that next target of 1110-1113. That could roll the RUT back into another support test. If the RUT can maintain 60-minute closes above about 1113, however, it sets a potential upside target from about 1124-1128.

If, instead of climbing tomorrow, the RUT falls through potential support at 1110, breaking through on a surge lower or on sustained 60-minute closes below that level, it sets a potential downside target near 1095-1097. This isn't a particularly strong support level although the RUT has recently often found support at this particular lower channel line. Any test of this support, however, should be watched closely, as there's the potential for the RUT to break through and head toward the next lower target, at about 1086-1089.

If support at or near 1086 doesn't hold on 60-minute closes, the next potential downside target is also marked. That's at about 1071-1075, according to Keltner evidence, but I would suggest watching for potential support to kick in as last week's 1079.12 intraday low is approached, too.

Looking back at the daily charts, we can see that today's candles were small and indicative of indecision. Some were produced right at likely resistance. Next direction could be any direction, with some indices looking as if they might be headed up and some, as if they might be headed down. The VIX ended the day in the same zone that it reached before the September equity index downturn. While that development doesn't prove anything, it does alert us to pay attention to our risk management.

I tried to begin where I should begin today and thank veterans for their service. To end where we as caring human beings should end today, my condolences to all whose loved ones might have faced the raging Typhoon Haiyan that aimed for the Philippines, Vietnam and other countries.

Linda Piazza