Market Internals

Introduction

We all knew as the market week began that we would be looking ahead to the FOMC decision later this week. Market participants prepare to parse any developments early this week for hints as to when tapering might begin. We also knew that it was less likely that the tapering would begin at this meeting if political uncertainty increased. This weekend, Paul Ryan (R), Chairman of the House Budget Committee planted his feet and said, "We don't want 'nothing' out of the debt limit" discussion (Fox News, via Marketwatch Capital Report. House Republicans are reportedly deciding what they do want. Today, President Obama planted his feet on the other side of the line. Spokesperson Jay Carney said President Obama's position had not changed from the position taken during the early October debacle.

Market participants didn't seem concerned. Was that because, back in October, the debt limit was suspended to February 7, 2014, still seemingly eons away, and some progress has been made on the budget deal? Was that because market participants conclude that the FOMC is unlikely to begin tapering with political rhetoric already heating up? Was that because some manufacturing numbers produced today delivered good news? Perhaps none of those influences had anything to do with the rebound. Technical traders might have noted that it appeared to be time for at least a technical bounce.

The SPX gained 0.63 percent; the Dow, 0.82 percent; and the NDX, 0.56 percent. The RUT jumped 1.16 percent, and the SOX, 1.31 percent. The Dow Jones Transports gained 0.91 percent. Despite the equity gains, volatility indices increased. While that is sometimes a warning not to trust the rally and might be a warning this time, too, our concern must be tempered when we know that we have that FOMC decision this week. Volatility indices often stabilize or rise ahead of such an important decision, even when equity prices are rising. We can't tell much either way just yet about those rising prices coupled with rising volatility indices.

It was a day when market participants seemed to be repositioning portfolios. Some recent decliners such as IBM (177.85, up 5.05 or 2.92 percent) rebounded, while some recent gainers such as Adobe (ADBE, 58.50, down 2.39 or 3.93 percent) fell. Some stocks such as Exxon (XOM, 97.22, up 1.91 or 2.00 percent) benefitted from the strong manufacturing numbers today. Some car manufacturers benefitted from economic results and predictions made today.

Gold futures (/GC) for February delivery settled at 1244.4, up 9.8 points. Silver futures (/SI) for March delivery settled at 20.101, up 0.497 points. Copper futures (/HG) for March delivery settled at 3.3295, up 0.0175 points.

Light sweet crude futures (/CL) for January delivery settled at 97.48, up 0.88 points. Many analysts mentioned the protests in Libya as an explanation for increased price.

Monday's Developments

Asian bourses traded lower last night, with currency-sensitive stocks among those trading lower. Some experts attributed the losses to concern ahead of our FOMC decision. The Nikkei 225 lost 1.62 percent; the Hang Seng, 0.56 percent, and the Straits Times, 0.40 percent. China's Shanghai Composite dropped 1.60 percent.

Europe focused on other events. Story stocks today included French retailer Carrefour, spending $2.8 billion, together with other investors, to buy 127 shopping malls in France, Italy and Spain in which it runs stores. Klepierre owns the malls. Carrefour will pay only 100 million euros in cash, with the rest of its stake secured by 45 malls it already owns in France. While U.S. shoppers might not be familiar with Carrefour, the company is the world's second-largest retailer. It's been struggling against online and local competition and feels that the leasing income will benefit the company. The company once owned more of the malls in which it operates, but it sold 150 of them in 2000. It's now reversing tactics.

In the U.S., we had a full slate of economic releases, but Europe had important releases, too. In the wee hours of this morning, the Eurozone flash manufacturing PMI beat expectations. It measured 52.7, above the expected 51.9 and the prior 51.6. Germany's flash manufacturing PMI also beat expectations, rising to 54.2, above 53.1 expectations and the prior 52.7. However, French flash manufacturing PMI disappointed, slipping further below the benchmark 50. Moreover, services PMI disappointed in Germany, France, and the Eurozone. The trade balance also disappointed, although it grew above the prior number. Equity markets appeared to focus on the beats, not on the disappointments or the perhaps increasing evidence of bifurcation in economic prospects across Europe.

ECB President Mario Draghi addressed the Committee on Economic and Monetary Affairs today, speaking about the Single Supervisory Mechanism and noting that this will be the last time he will take the lead since a new Chair of the Supervisory Board will soon be appointed. He wants further steps taken toward a banking union for the Eurozone. He noted that the Eurozone's economic recovery has been fragile and that price pressures remain subdued with unemployment still high. He believes the risks are still to the downside. He believes that key interest rates will remain at present or lower levels for an extended time. Banks have been repaying Long Term Refinancing Operations' supplied funds, he said, reducing excess liquidity in overnight money markets.

Draghi believes the ECB would be ready to supervise a banking union by November 2014. He wants to preserve the ECB's mandate for price stability with a clear separation between monetary policy and banking supervisory functions wherein each unit learns information on a need-to-know basis. He mentioned backstops to ensure the "credibility and rigour" of the assets that would be involved in a banking union, including sovereign bonds. He campaigned for the creation of a "robust Single Resolution Mechanism" that includes a "single system, a single authority, and a single fund."

European bourses climbed. The FTSE 100 gained 1.28 percent; the DAX, 1.74 percent; and the CAC 40, 1.48 percent. Spain's IBEX 35 gained 1.69 percent, and Italy's FTSE MIB, 2.34 percent.

Today's slate of U.S. economic releases began with New York's Empire State Manufacturing Survey. Before the release, analysts had looked at November's decline. The drop in new orders, in particular, had hinted at further declines in succeeding months. They were right. December's overall number printed at 1.00, a disappointment when compared to forecasts but not when compared to the prior -2.2. The Federal Reserve Bank of New York termed December's result "flat."

When breaking the report into separate categories, the results proved mixed. New orders, shipments and prices paid indices rose, although new orders still remained negative. Indices for unfilled orders, inventories, delivery time, and average workweek dropped. The indices for unfilled orders and inventories were at their lowest levels since 2009, the Federal Reserve Bank of New York noted. The bank's interpretation was that the backlog of orders had significantly declined. Manufacturers were generally upbeat about future conditions but mentioned concerns about the cost of employee benefits next year as well as the difficulty of finding qualified employees.

At the same time, quarter-over-quarter changes in revised Nonfarm Productivity and Unit Labor Costs were released, twelve days behind schedule due to the shutdown. Analysts predicted that productivity would rise 2.9 percent, with the consensus range from 2.2-3.2 percent, according to Econoday. This is an annualized rate. Productivity remained within that range, rising 3.0 percent. The Bureau of Labor Statistics said the increase was driven by a 4.7 percent increase in output and a 1.7 percent increase in hours worked. This result represented the largest increase in the quarterly series since the last quarter of 2009, the government's report noted. Year over year, productivity increased 0.3 percent.

In this quarterly report, the manufacturing sector saw a 0.1 percent drop in productivity. The initial reading had pointed to an increase of 0.4 percent. When broken down into sectors, productivity increased in the durable goods sector, showing a 1.1 percent gain. Productivity decreased in the nondurable goods and nonfinancial corporate sectors, by 1.0 percent and 0.7 percent, respectively.

Revised unit labor costs were expected to drop 1.4 percent, with the consensus range for the reported number from -1.6 percent to 0.0 percent. Unit labor costs dropped, with the drop reported at 1.4 percent. Hourly compensation rose 1.6 percent.

Thirty minutes later, Markit's December Flash Manufacturing PMI appeared. Today's report calculated flash manufacturing PMI at 54.4 rather than the anticipated 54.9, although Markit headlined the report by saying, "Output growth remains strong and close to November's 20-month peak." In addition, the prior number was revised higher from 54.3 to 54.7. The three-month average rose to 53.6, up from the 53.2 three-month average leading into the September report. Bullet points included the strongest rise in employment since March and an acceleration of input price inflation. Markit noted that the firm had received approximately 85 percent of the usual monthly replies.

Output, new orders, new export orders, employment, backlogs of work, output prices, input prices, quantity of purchases and suppliers' delivery times increased. Stocks of purchases and stocks of finished goods contracted.

Moody's weekly Business Confidence again offered a glowing report and added back the "consistent with the economy growing at the high end of its potential" language that had gone missing in recent months. The headline number jumped to 36.2 from the prior 32.9, and Moody's termed the business confidence "about as strong as it has been in the over 10 years of the survey." Companies appear to be investing in equipment and software, the firm noted.

The Department of the Treasury released the Treasury International Capital (TIC) report this morning, with U.S. long-term securities purchased by foreigners running 35.4B more than foreign long-term securities purchased by U.S. citizens. This amount was more than the anticipated 31.4B, and this report also revised the prior 25.5B excess to 31.3B. When this report indicates strong demand for U.S. debt and assets, bonds prices and the dollar tend to be supported, and ten-years, thirty-years and the dollar did initially react to this release by climbing. That early move was reversed by the end of the day.

The last important release was the November Capacity Utilization Rate, rising to 79.0 percent, above the forecast 78.5 percent and the prior 78.2 percent, and the month-over-month Industrial Production, rising 1.1 percent. Industrial production was above the predicted 0.6 percent gain and the prior revised higher 0.1 percent gain.

Because of the number of reads on industrial production today (government's quarterly, Markit's monthly, Federal Reserve's monthly), it may be difficult to keep them straight, but this is a month-over-month report. The Federal Reserve noted that the 1.1 percent gain in industrial production was the largest seen since November 2012. Moreover, total industrial production surpassed its peak in 2007, reaching 101.3 percent of its 2007 average. Capacity utilization, even though beating expectations, still runs 1.2 percentage points below its 1972-2012 average, the Federal Reserve noted.

According to this report, manufacturing output increased 0.6 percent, marking the fourth consecutive monthly gain. Colder-than-average temperatures drove up demand for heating, increasing utility output by 3.9 percent.

CreditForecast.com also provided its latest update on Household Credit. In November, outstanding U.S. household debt increased to $11.1 trillion. Consumers took on more first mortgages and auto loans, driving the debt higher. First mortgage originations rose 15 percent year over year, the organization noted. With the growth in debt came an increase in the delinquency rate by volume, rising to 4.46 percent from October's 4.33 percent. However, those defaults were driven by first mortgage and auto loan portfolios, with bankruptcies and bankcard defaults declining to their lowest recorded level, according to CreditForecast.

Story stocks today included Anadarko (APC, 79.07, up 0.77 or 0.98 percent). Prices again climbed off the low produced last Friday after the surprise court ruling making the company responsible for cleanup costs. Jim Brown detailed the ruling in this weekend's Wrap.

Herbalife (HLF, 74.83, up 6.45 or 9.43 percent) jumped in the initial moments after it announced results of a re-audit after the close. The company said the auditor made no material changes when re-auditing the results of the last three years.

American International Group, Inc. (AIG, 50.28, up 0.55 or 1.11 percent) will sell its 100 percent stake in International Lease Finance Corp., with the deal expected to close in the second quarter of 2014, the company announced today. The buyer, AerCap Holdings N.V., will pay $3 billion in cash and 97.56 million AerCap common shares, bringing the deal's worth up to $5.4 billion. AIG had previously been involved in a share purchase agreement with Jumbo Acquisition Limited to sell up to 90 percent of the common stock of International Lease Finance Corp. That deal was terminated.

Avago (AVGO, 50.10, up 4.45 or 9.75 percent) will acquire LSI Logic (LSI, 10.96, up 3.05 or 38.56 percent) for $11.15 per share. LSI closed at 7.91 on Friday. AVGO expects that the acquisition will be immediately accretive to its non-GAAP earnings per share, with the deal valued at $6.6 billion. AVGO believes this acquisition positions the company as a highly diversified semiconductor market leader. Funding comes from cash from the combined balance sheet, a $4.6 billion term loan from banks and a $1 billion investment from Silver Lake Partners. The funding is fully committed and the acquisition approved by both boards.

Covidien Plc (COV, 66.33, up 0.52 or 0.79 percent), manufacturer of healthcare products for use in clinical and home settings across the globe, issued further details about changes in its revenue reporting format. The company will report sales broken into three major product categories: Surgical Solutions, Vascular Therapies, and Respiratory and Patient Care. The company is also breaking out non-U.S. sales. The company will also allocate expenses differently.

The company also noted a forex-related reduction in reported revenues for fiscal 2014. Net sales are expected to rise 2-5 percent, operating margin to be 21.5-22.5 percent, and the effective tax rate to be 16-17 percent. These numbers exclude one-time items, and have been termed in line with previous guidance.

Twitter (TWTR, 56.61, down 2.39 or 4.05 percent) received downgrades from both SunTrust and Wells Fargo.

Procter & Gamble (PG, 81.69, down 0.68 or 0.83 percent) announced a reorganization of its overseas business. The reorg is intended to cut costs.

Car manufacturers might like the prediction of IHS Automotive. IHS's business information provider unit forecast global automotive sales of 85 million sales in 2014, above this year's estimated 82 million. The unit predicts global auto sales above 100 million by 2018, with the firm's economist expecting economic growth in each of the world's major economies.

Media and marketing solutions company Gannett Co., Inc. (GCI, 26.66, up 0.47 or 1.79 percent) announced that it has come to an agreement with the Justice Department that will allow for its acquisition of television company Belo Corp. (BLC, 13.75, up 0.05 or 0.36 percent), as long as Belo first sells a television station in St. Louis. The deal is still subject to approval from the FCC as well as other conditions. The acquisition was previously announced.

Pfizer (PFE, 30.25) today announced that it was increasing its dividend to $0.26 per share. That dividend had previously been $0.24 per share.

Boeing (BA, 134.72, up 0.89 or 0.67 percent) jumped more than $2.00 in after-hours trading. The company raised its dividend by 50 percent, to $0.73/share. The company's board also authorized an additional $10 billion to be spent on the company's share buybacks. Today, the company also announced that it was going to expand aviation training in Russia to provide support to its Russian customers. The company also announced an expansion of its South Carolina Facility.

Let's look at daily charts.

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 has begun trading back and forth across its red 9-ema. The SPX no longer maintains its strongest rally pattern. When maintaining that strong rally pattern, it bounces from a rising red 9-ema or, if it tests the bottom of its smallest (grey) Keltner channel, bounces quickly enough and high enough to turn the 9-ema higher again. Instead the SPX has established a choppy pattern, flattening the 9-ema as price trends down inside a short-term flag-like price channel. This could be the start of a deeper decline or it could be just a bull-flag pullback. We just don't know yet.

Nearest strong support on daily closes might be found between about 1,756-1,770. Tests of that zone still don't tell us much as long as support holds there on daily closes and prices then bounce back up through that small flag-like formation. Sustained daily closes beneath about 1,756, however, set up a new potential downside target from about 1,713-1,733, where next support might converge near the bottom of that range. The Keltner system suggests that lower target if 1,756 is violated on daily closes, but also be aware of potential historical support near 1,747.

That potential support near 1,713-1,733 is a must-hold kind of level for the SPX if the long-term climb through the large rising regression channel is to be preserved. A lower potential downside target is marked in case it doesn't hold, however.

If the SPX climbs this week instead of declines, sustaining daily closes above about 1,791, it sets up a potential upside target near 1,807-1,825. Resistance may still be strong in that zone, so it's not until the SPX produces consistent daily closes above about 1,825 that I would consider it breaking free of the amassed resistance. Until then, it's just retesting resistance. If it does maintain daily closes above about 1,825, however, it's in breakout mode on this daily chart. That's dangerous for bulls and bears alike, as it's impossible to determine when the breakout ends or whether it ends with a sideways movement or a sharp decline.

Annotated Daily Chart of the Dow:

The Dow also no longer follows its typical rally pattern, pulling back inside a falling price channel that may be either the beginning of a deeper decline or just a bull-flag pullback. We just don't know yet.

Nearest potential support on daily closes ranges from about 15,634-15,748. A failure to maintain daily closes above about 15,634 and particularly above 15,600 sets up a potential downside target from about 15,324-15,450. That's a kind of must-hold level for the Dow, as previous downdrafts have found support on most daily closes at that configuration. Losing that support would be a long-term change in the Dow's pattern and would set the next potential downside target, marked on the chart.

What if the Dow bounces the rest of the way up through the flag-like formation in which it's been moving down? Potential resistance on daily closes lies from about 15,874-15,970. If the Dow can break through about 15,970 on consistent daily closes, it sets a potential upside target of 16,057-16,166. It's not until the Dow produces daily closes above about 16,166 that it sets the highest target marked on the chart.

Annotated Daily Chart of the NDX:

The NDX has better preserved its recent pattern, although it's beginning to chop back and forth a bit, too. Keltner channel lines that had formerly served as support are beginning to look like resistance, at least over the short term. However, with consistent daily closes above about 3,500, the NDX would tentatively set a potential upside target from about 3,513-3,547. With closes above about 3,547, it would again move into breakout territory.

Consistent closes beneath about 3,434, however, would set a potential downside target at about 3,364-3,400. It's possible that a close below last week's 3,349.74 low would be enough to set that potential downside target.

Sustained daily closes beneath 3,364 would set a potential downside target of about 3,246-3,305. That's a must-hold type of level for the NDX, as a failure to hold that support on daily closes would change a long-time pattern. A low potential downside target is marked in case that 3,246 support should fail.

Annotated Daily Chart of the RUT:

The RUT's short-term declining price channel has been sharper than that seen on other indices. That also means that the RUT doesn't have as far to move upward to break through the price channel's upper boundary. The RUT may be the first index that will show us whether prices are more likely to break up through these short-term declining prices channels, converting them to likely bull flags, or break down beneath them, converting them to the start of a bigger decline.

The RUT faces potential resistance on daily closes from about 1,115-1,125, resistance that it began testing today. It's not until the RUT can sustain daily closes above about 1,125 that I would consider it breaking free of that declining price channel's upper boundary. The RUT would then be setting a potential upside target of about 1,132-1,150, with resistance likely converging and strengthening near the top of that zone if a rally is a sudden one by the middle of this week. Keltner channel evidence would suggest that the RUT is again in runaway mode if it can sustain daily closes above about 1,150. No new Keltner targets are available because the RUT would have broken free of the channeling system. That constitutes a dangerous time for bulls and bears alike because a rally breakout can continue longer than seems logical and also because it can collapse suddenly.

What if the RUT rolls down instead of breaks up through that declining price channel? Keltner channels suggest that potential support on daily closes might be found from about 1,095-1,108, near last week's low. Bulls would hope to see that support again hold if retested. If the RUT maintains daily closes below about 1,095, however, it sets a potential downside target near 1,068-1,075. A failure to maintain closes above about 1,068 would be a change in long-term pattern for the RUT and would set the lowest potential downside target, marked on the chart.

Annotated Daily Chart of the VIX:

After coming back last week to retest the support of the former resistance trendline, the VIX bounced again. It's maintaining its breakout. As long as it remains above about 15, it looks as if 17-19 might be reached. Equity bulls would like to see the VIX back below 13-15, but they should be prepared for the just-in-case possibility of equities rolling over again if the VIX reaches 13-15 and then bounces again. Equity bears would like to see the VIX continue to climb and then break through about 17-19, but they should be prepared for the just-in-case possibility of equities steadying once the VIX reaches 17-19 if the VIX then retreats, as it sometimes does once reaching that level.

The recent action is certainly worrisome to equity bulls, especially since it includes a retest of recent resistance, to confirm it as support and then a bounce to a new recent high. However, as was mentioned earlier, we must temper our expectations since we know that volatility indices sometimes rise ahead of market-moving events. All in all, though, this is not good news for equities.

Tomorrow's Economic and Earnings Releases

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

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

After this morning's surge higher, the SPX trended sideways down, between nearby support and nearby resistance. The setup suggests that consistent 30-minute closes above about 1,796 set a potential upside target near 1,814-1,817, but of course we must be cognizant of the resistance likely offered at the recent high of 1813.55. The short-term setup also suggests that consistent 30-minute closes beneath about 1,783 sets a potential short-term downside target of 1,772-1,776 and perhaps even 1,763-1,766 if that first support fails to hold on 30-minute closes. The shape of the chart gives a slight preference to the upside break, but the Keltner setup does not suggest a stronger likelihood for an upside breakout. There's not much of a conclusion to be drawn from these short-term charts and we can remember that the daily charts showed that upper candle shadow left behind. With emotion-based trading likely to rule this week, I wouldn't give 100 percent trust in a short-term chart setup anyway.

Annotated 30-Minute Chart of the Dow:

Similarly, the Dow's chart suggests that sustained 30-minute closes above about 15,960 set up a potential upside target of 16,106-16,138. Sustained 30-minute closes beneath about 15,843 sets up a potential short-term downside target of about 15,725-15,759 or perhaps even 15,643-15,675 if that next higher support fails to hold on 30-minute closes. The shape of the chart gives a slight preference to the upside break but the Keltner setup does not suggest an increased likelihood for an upside break over a downside one. The daily chart shows an upper candle wick or shadow left behind, as sellers overwhelmed buyers. As was true of the SPX, I wouldn't invest 100 percent trust in any short-term chart setup anyway with tomorrow's trading likely to be emotion driven ahead of the FOMC decision. I do know that, like the SPX, the bulls were finished after the first 30-minute period except for holding prices up mostly near their high. They could not or were not willing to drive prices higher.

Annotated 30-Minute Chart of the NDX:

The NDX's gains were also mostly finished in the first 30 minutes of the day when they were driven higher by futures action. Bulls could not or were not willing to push prices any higher after that first reaction. The Keltner setup suggests that sustained 30-minute closes above about 3,484 set up a potential upside target near 3,493-3,503. Resistance there turned the NDX back today, so it would need sustained 30-minute closes above about 3,503 before it set the next potential upside target marked on the chart.

Sustained 30-minute closes beneath about 3,469 set a potential short-term downside target near 3,447-3,457, with likely support found in that zone unless the NDX barrels through it. The next downside target is also marked in case that support doesn't hold on 30-minute closes.

Annotated 30-Minute Chart of the Russell 2000:

The RUT was alone among these indices in making additional gains after that first thrust higher in the morning. Still, it spent the day trapped between potentially strong resistance on 30-minute closes up to about 1,120 and potentially strong support on 30-minute closes down to about 1,116. On consistent 30-minute closes above about 1,120, the RUT sets a potential upside target of about 1,133-1,135, but be careful of pop-and-drop potential on an early rise. You want to see higher prices maintained before you believe in a breakout. The trouble with the RUT is that the upside target can be hit relatively quickly after a breakout, before you feel it's confirmed.

On consistent 30-minute closes beneath about 1,116, the RUT sets a potential downside target at about 1,110-1,113. Other lower potential downside targets are also marked, if needed.

Will they be needed? If market participants feel that they've been provided information tomorrow that strongly suggests either tapering or not tapering any time soon, indices could break out to the downside or to the upside, and likely will. Absent that information, however, they may do what they often do ahead of an important FOMC decision. Prices may get parked at important support or resistance levels and may chop back and forth across those levels in ever tightening coils until more information is forthcoming, either Wednesday morning or at the announcement.

We need levels to watch to help us test the market action against our scenarios about what might happen. In this kind of environment, however, seeming breakouts are often reversed, just as a newby driver might overcorrect when that driver accidentally wanders over the center line or onto the shoulder of the road. That wandering didn't signal any intention to turn, and a little wandering here and there might not signal market intentions tomorrow, either.

Unless it does. Unless the markets decide that they have enough information that their original positioning was erroneous. Decide tonight whether you want to give more leeway or less leeway in deciding whether prices are breakout out. If you give less leeway, you may be overcorrecting each time there's a little jit or jot. If you give less leeway, losses can grow if the breakout accelerates or opportunity can be lost if your entry is quickly exceeded. There's no one right or wrong choice in this environment. Decide which is right for you.

Watch the RUT, especially on the daily chart and especially since small caps are more sensitive to interest-rate changes than big caps. We can all draw trendlines, no matter what our technical analysis skills. Draw a price channel that shows you whether the RUT is breaking to the upside or falling out of the little flag pullback. Confirm that the RUT is maintaining the breakout or breakdown. Watch the VIX. Keep the Dow Jones Transports on your radar screen, too. Linda Piazza

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