Market Internals

Introduction

Today, Moody's said businesses were "steadfastly confident." Market participants appeared to be, too. Despite negative economic data from China and ongoing disputes in the Ukraine, market participants bought when indices hit key levels. Most indices ended the day with small percentage losses, but the NDX even managed a small gain.

This afternoon, White House spokesperson Jay Carney said that the U.S. will not recognize the results of next Sunday's Russian-backed referendum on the future of the Crimea. In addition, Prime Minister Arseniy Yatsenyuk, newly elected head of Ukraine's government, will meet with President Obama Wednesday at the White House and will address the United Nations Security Council on Thursday. His government is viewed as pro-Western. U.S. Defense Secretary Robert Gates has reportedly said that the Ukraine will never cede Crimea back to Russia, but Russia apparently has other ideas on the matter.

The SPX dropped 0.05 percent, and the Dow, 0.21 percent, but the NDX gained 0.08 percent. The RUT fell 0.23 percent, and the SOX, 0.20 percent. Volatility indices climbed. Ten- and thirty-year yields dropped, with the associated treasuries gaining. The RTH, the Retail HOLDRS Trust, lost only 0.03 percent today ahead of earnings this week from several retailers. The KBW Bank Index (KBW) gained 0.04 percent.

Commodities, commodity-related equities such as the miners, and Chinese-related equities reacted at the open to negative economic results from China, among other causes. Other than copper, however, they were not much changed by the end of the day. Gold futures (/GC)for April delivery settled at 1,341.50, up 3.3 on volume much lower than Friday's volume. Silver futures (/SI) for May delivery settled at 20.910, down -0.018, also on volume much lower than Friday's. Copper futures (/HG) for May delivery settled at 3.0315, down 0.0510, again on volume much lighter than Friday's. Light sweet crude futures (/CL) for April delivery settled at 101.12, down 1.46, also on lighter volume than Friday's.

Monday's Developments

Asian bourses fell last night. Japan's fourth-quarter GDP met expectations of 0.2-percent growth, but those expectations had been revised lower. Some analysts still expected 0.3-percent growth, depending on the source consulted, so the report was deemed a disappointment. That was important as market participants examine reports for information on the efficacy of Abenomics, the financial policies pushed by or supported by Prime Minister Shinzo Abe.

Slower growth in private consumption and capital spending led to the lower GDP. That meant the full-year GDP was lower than originally expected, too, at 0.7 percent rather than the initially expected 1.0 percent. In addition, Japan's current account deficit hit a record. The final GDP price index dropped less than expected, however.

China had also reported results that disappointed this weekend, with last night's trading session the first to respond to those numbers. Jim Brown detailed China's disappointing 18 percent drop in exports in this weekend's Wrap. Some experts pointed out this morning that the actual drop may not be as big as it appears. They speculate that last February's comparison numbers may have been inflated, and China has been moving to stop such practices.

The Nikkei 225 tumbled 1.01 percent; the Hang Seng, 1.75 percent, and the Straits Times, 0.31 percent. China's Shanghai Composite dropped 2.86 percent.

European bourses turned in mixed performances, although all were well off their days' highs. What was happening in Europe? The ECB is expected to provide European banks with details of the asset quality test. Banks are expected to revalue assets held if more than a year has passed since those assets were valued. Eurozone financial ministers said today that they were optimistic about the chances for a planned single resolution mechanism to rescue troubled banks that threaten the financial system, but no agreement appears to be made as to how such a mechanism would be financed.

In addition, the upheaval in the Ukraine impacts European markets as much as, if not more than, U.S. markets. Europe's energy supplies depend on Russia and pipelines through the Ukraine.

ECB governing council member Christian Noyer spoke today at a panel discussion in France. He said that low inflation and nominal wage growth inhibits the ECB's ability make adjustments that would enable some countries within the EU to again become competitive. He hastened to point out that low inflation was not the same thing as deflation, but some experts in Germany fear deflation in Europe. The head of the German Institute for Economic Research (DIW) in Berlin wants to see 60 billion euros of bond purchases each month to avoid deflation.

The FTSE 100 dropped 0.15 percent, and the DAX, 0.91 percent. The CAC 40 managed a 0.10 percent gain. Spain's IBEX 35 gained 0.30 percent, and Italy's FTSE MIB, 0.29 percent.

Early this morning, Federal Reserve Bank of Philadelphia's President Charles Plosser participated in a panel in Paris titled "Monetary Policy and Banks and the Rise of Global Protectionism," the same panel from which the ECB's Noyer made his statement. Plosser is a voting FOMC member this year. Among other statements, Plosser expressed his belief that this winter's severe weather patterns likely impacted U.S. job growth. He believes unemployment will likely be 6.2 percent by the end of the year. Some FOMC speakers lately have said that the FOMC must move away from any strict adherence to certain unemployment numbers as a benchmark for its asset-purchase program since unemployment may be falling for structural reasons and not because of economic growth. However, Plosser is no fan of the FOMC's asset-buying program.

Early in the afternoon, Federal Reserve Bank of Chicago's President Charles Evans spoke on monetary policy and the economy in Columbus, Georgia. He confirmed that the Fed looks for ways to provide better guidance rather than relying on the 6.5 percent unemployment rate threshold. Although Evans is an alternative member of the FOMC this year and not a voting member, he is credited as leading the plan that introduced that 6.5-percent rate threshold, so his comments on this issue remain important. He also affirmed that he's optimistic about the chances of the U.S. economy achieving a 2.5-3.0 percent annual growth rate this year.

Moody's weekly Business Confidence dropped to 36.1 from last week's 37.0. Still, Moody's characterizes businesses as "steadfastly confident" in the face of weakening economic, as mentioned earlier in the Wrap. Businesses appear to believe that the weakening was temporary and due to weather.

The White House's "Economic Report of the President" was released today. This 415-page report will require some time to digest, but bits and pieces were discussed today. Since the conclusions and/or acceptance or rejection of the data will likely fall out along party lines, especially those in Chapter 4 ("Recent Trends in Health Care Costs, Their Impact on the Economy, and the Role of the Affordable Care Act"), I'll leave this as fodder for later discussions. Those who would like to access the report for themselves can find it at this link.

One conclusion that didn't (yet) seem to be contentious was that U.S. households have been paying off debt. Debt is now 1.1 percent of annual disposable income, rather than 1.4 percent in the last quarter of 2004.

Story stocks included JPMorgan Chase (JPM, 59.20, down 0.20 or 0.34 percent). Reuters reported that the bank's sale of its private equity business, One Equity Partners, stalled after the bank raised the asking price. Reuters reported that One Equity Partners had now been pulled off the market. Volume was less than average.

Facebook (FB, 72.03, up 2.23 or 3.19 percent) benefitted when UBS raised its price target to $90.00. The UBS analyst claims that the stock is under-monetized compared to its peers, when time spent on its platform is considered.

Bed Bath & Beyond (BBBY, 69.46, up 0.30 or 0.43 percent) lowered guidance from the fourth quarter in what was termed a "preannouncement." The prior consensus had been for $1.65 per share, and the company guided to a range of $1.57-1.61 per share. Credit Suisse chimed in and pointed to the adverse effect of the weather, saying that the company likely would have met expectations except for the weather. The stock gained on volume well over average daily volume.

Quest Diagnostics Inc. (DGX, 52.66, up 0.08 or 0.15 percent) raised guidance and announced that it has completed its acquisition of Solstas Lab Partners Group. The company said first quarter earnings would be in the range of $3.95-4.15 per share with the prior expectation at $4.04 per share.

Alexion Pharmaceuticals (ALXN, 180.00, up 11.95 or 7.11 percent) also raised its earnings outlook, in this case for its 2014 adjusted earnings. The company expects $4.37-4.47, up from its prior range of $3.70-3.80. The company said that a French government reimbursement deal for its blood disorder medication would bring the company an additional $88 million in sales.

Starwood Hotels & Resorts Worldwide Inc. (HOT, 79.50, down 1.16 or 1.44 percent) expects record growth in emerging markets. It expects to open 35 new hotels in the next 12 months.

A proxy battle and weak data from China hurt iron ore mining company Cliffs Natural Resources (CLF, 17.95, down 0.70 or 3.75 percent). The company's announcement that it would indefinitely delay its shareholder meeting previously set for May met with disapproval from the shareholder requesting a delay, Casablanca Capital. Casablanca Capital is calling for the company to spin off some assets.

AT&T (T, 32.51, down 0.03 or 0.09 percent) said today that individual customers who do not have annual service contracts can receive lower wireless data charges. The company believes this move better positions the company to compete with T-Mobile US (TMUS, 30.97, up 0.18 or 0.58 percent). A customer with one smartphone can now pay $65.00 for a plan with unlimited talk and text messaging and unlimited international messaging, 50 GB cloud storage, and 2GB LTE wireless data. That plan previously would have cost $80.00.

eBay (EBAY, 58.22, down 0.84 or 1.42 percent) has asked shareholders to vote against Carl Icahn's nominees for the board, and Carl Icahn wasn't happy. He took to talk TV to criticize the decision. EBAY claims, however, that "neither nominee has relevant experience or expertise," and each is guilty of "overboarding," each already serving on more than four public company boards."

After the close, Urban Outfitters (URBN, 37.51, down 0.05 or 0.13 percent) reported earnings of $0.59 per share against expectations of $0.54 per share. Analysts had expected revenue of $926 million, according to Thomson Reuters, but the company reported only $906 million. Same store sales fell 9 percent at its Urban Outfitters stores but gained 20 and 10 percent, respectively, at its Free People and Anthropologie stores.

The Boeing Company (BA, down 1.65 or 1.28 percent) dropped. The blame for the drop was placed on the missing Malaysia Airlines Flight, although that plane's safety record is sound. However, a Boeing 787 Dreamliner also made an emergency landing in Honolulu on Saturday.

With 20 of its employees aboard the missing Malaysian Airlines flight, Freescale Semiconductor (FSL, 23.09, down 0.30 or 1.28 percent) lost, but it traded on about average daily volume.

Diversified chemicals company FMC Corp. (FMC, 83.10, up 5.23 or 6.72 percent) will split into two companies. One will focus on the minerals business.

Still running a PC with XP? Microsoft (MSFT) announced today that it would stop servicing XP.

Last Monday's Wrap mentioned Apple's (AAPL, 530.92, up 0.48 or 0.09 percent) plan to introduce CarPlay, a feature that allows you to connect your iPhone to your car's in-dash display panel and then use Siri voice commands or the car's display touchscreen to access apps. Today, AAPL has released iOS 7.1 that will support CarPlay, among other changes, including fingerprint touch ID recognition. Those knowledgeable about the new operating system warn that it requires at least 2.5 gigabytes of storage, however, for the update to complete.

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.

Legend for Keltner Channels and Moving Averages:

This legend applies to the SPX, but the moving averages and Keltner setup is consistent across all the charts I use and can be referenced for all of them.

Annotated Daily Chart of the SPX:

The SPX continued its strongest rally pattern through last week, rising along the spine of a climbing 9-ema. That rally pattern usually includes an initial strong bounce off the moving average and then 3-5 days of sideways to sideways-up movement while the 9-ema moves up underneath then-current values. Then, it's often time for a quick dip to retest that 9-ema's support before the pattern is resumed. Last week ended with the SPX and several other indices due for a dip toward the 9-ema, and today's action produced that dip.

And that dip produced a bounce off the 9-ema's support. That bounce would suggest the possibility of a next move being up toward next resistance.

However, it's been a long time and a lot of points since the SPX has dropped all the way to the lower boundary of its smallest (grey) Keltner channel. That's a natural part of the rally pattern, too, and the SPX looks overdue for such a test. That's no guarantee it will happen, of course. If that drop should occur, it's not a negative sign as long as the SPX rallies back above its 9-ema within two or three days.

First potential support on daily closes for the SPX extends down to about 1,860, with a failure there setting a potential next target at the bottom of the SPX's smallest Keltner channel. As explained, it would not be unusual, even in a bullish pattern, for the SPX to hit that next target from about 1,836-1,850. Bulls would want to see support on daily closes kick in within that range and send the SPX back above its 9-ema. A failure to hold support on consistent daily closes at or above 1,836 targets 1,819-1,832. Two lower potential targets are also marked on the chart, if needed.

What if the SPX can instead sustain daily closes above about 1,184, the top of the current resistance band? It then sets a next potential upside target from about 1,891-1,906.

Annotated Daily Chart of the Dow:

Today, the Dow dropped down to test the 9-ema as well as potential Keltner support on daily closes. That support zone extends from about 16,245-16,340, with the 9-ema currently within that zone, too. Today, the Dow bounced from that retest of 9-ema support. That would suggest another bounce up to test next resistance.

However, the Dow also looks overdue for a test of the lower boundary of its smallest (grey) Keltner channel. Of course, that's no guarantee that the Dow will test that lower boundary. If it does, bulls want to see the Dow then bounce back above a still-rising 9-ema within two or three days.

Consistent Dow daily closes beneath about 16,245 may suggest that the lower boundary of that grey channel will be tested. If so, the Dow may target 16,100-16,150, or even 16,000, with potential support on daily closes layered thickly within that range. A failure to hold support at or above 16,000 on daily closes targets 15,800-15,900, with two lower potential targets also marked on the chart, if needed.

What if the Dow continues bouncing from the climbing 9-ema without first retesting the lower boundary of its smallest Keltner channel? The Keltner setup suggests a nearby target of 16,500-16,645, with potential resistance on daily closes within that range. Sustained daily closes above about 16,645 set a potential upside target of 16,750-16,890.

Annotated Daily Chart of the NDX:

The NDX also dropped to test its rising 9-ema, piercing that moving average and then clinging to it rather than bounding up from the retest. Although the NDX's rally pattern with regard to the 9-ema and Keltner channels is not as strong as it is for the SPX and Dow, the NDX has adhered fairly well to that pattern, too, on this rise. One exception was last Monday, but that turned out to be a one-day exception rather than consistent daily closes below the 9-ema. Therefore, we can conclude that the NDX still holds to a strong rally pattern.

Typically, however, the NDX cycles more often all the way through its smallest Keltner channel than do the other pictured indices. From that perspective, the NDX is overdue for a retest of the lower boundary of the smallest of its Keltner channels. That retest would be accomplished by a drop to the next lower potential downside target, at about 3,600-3,646. If such a retest occurs, a failure to hold support at or above 3,600 on consistent daily closes would then set the next potential downside target, currently at about 3,450-3,500.

Just because the NDX appears overdue for a retest of the lower boundary of its smallest Keltner channel doesn't mean such a retest will occur. Currently, however, the NDX faces potential resistance on daily closes that extends from about 3,694-3,758. The NDX keeps trying to break out of the upper resistance on its broadening formation, but it never can pull far above its gravitational pull when such attempts occur. Still keeps making new recent highs, though, doesn't it, as it climbs along that trendline.

Annotated Daily Chart of the RUT:

The RUT also dropped into a retest of its 9-ema today. Sustained daily closes below about 1,188 would set a potential downside target of 1,158-1,172, which would bring the RUT down into a retest of the lower boundary of its smallest (grey) Keltner channel. Such retests sometimes occur during RUT rallies, but then prices need to bounce back above the 9-ema within a few days to maintain the most bullish tenor. If the RUT should fall to that next lower target and then bounce, it looks as if the action could firm up the resistance it's testing now, so be aware of that potentially stronger resistance on the next go-round if there's a quick fall and then a just-as-quick bounce. The RUT would need sustained daily closes above about 1,203 before it sets its next potential upside target at about 1,212-1,224.

If the RUT falls to 1,158-1,172 and fails to bounce, sustaining daily closes beneath about 1,158, it sets a potential downside target near 1,110-1,123. A lower potential target is also marked, if needed.

Annotated Daily Chart of the Dow Jones Transports:

The DJT serves as an indicator index, although lately it's been more of a follower than a leader. Goods have to be transported, so keeping it on the radar screen may remain a good idea as we try to ascertain whether early year weakness really was due to the brutal weather. If we see the DJT break out to the upside and sustain those gains, it may be verifying a strengthening of the economy. We'll perhaps need that strengthening, since 10-year and 30-year treasury yields are attempting to break out to the upside, too. Perhaps we'll need growth that will allow us to overcome the effects of rising rates.

Tomorrow's Economic and Earnings Releases

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

Tonight, Japan's Monetary Policy Statement could roil currency markets, and, therefore, equity markets. A number of important European numbers will also be released in the wee hours of the morning.

What about Tomorrow on the Intraday Charts?

There's a problem with the intraday charts on all these indices. Those charts show that the Keltner channels are flattening and that prices within those channels are churning back and forth across also flattening 9-ema's. That renders movement within those purple, 45-ema-based channels just churn, without much predictive power as to the next ultimate direction. We can't even guarantee that once prices break out of the also-flattening smaller grey channels, they'll travel all the way to the next (purple) Keltner channel's boundary. Such is churn.

Annotated 30-Minute Chart of the SPX:

The SPX has begun a sideways pattern in which it churns between the borders of the flattening (purple) 45-ema based Keltner channel. When this happens, we can't predict much about ultimate direction until the SPX breaks out of that channel in either direction. That means we would need to see consistent 30-minute closes above about 1,885 to set a new potential upside target of about 1,890-1,894. Can anyone doubt that market participants would respond to the lure of 1,900 if 1,894 is breached? Can anyone also doubt that there will be sell orders lurking just beneath and just above 1,900 if it's approached? In other words, even a sustained breakout above 1,885 will soon find potentially significant resistance.

We would also need to see sustained 30-minute closes beneath about 1,860 before the next potential downside target is set, with that target at about 1,835-1,840. Until then, unfortunately, we're seeing churn. It's possible that sustained 30-minute closes beneath about 1,870 would make a test of 1,860-1,865 more likely and sustained closes above about 1,876 would make a test of 1,881-1885 more likely, but those several-point moves are still not going to give us much information about ultimate direction.

Be aware that a gap tomorrow morning could decide next direction for us if it's sustained much beyond amateur hour.

Annotated 30-Minute Chart of the Dow:

The Dow's 30-minute chart looks much like the SPX's: churn within flattening Keltner channels, with the (purple) 45-ema-based channels now the most important for determining breakouts. I've set up a potential support/resistance zone around the smallest (grey) Keltner channel, but sustained 30-minute closes outside those boundaries would not be particularly predictive of next direction. The Dow needs to sustain 30-minute closes above about 16,500 to set a new nearby upside target, at about 16,550-16,590. It needs to sustain 30-minute closes below about 16,300 to set up a new nearby potential downside target, at about 16,060-16,100. Between 16,300-16,500, the Dow unfortunately churns. Breakouts above or below the zone surrounding the small grey Keltner channel suggest only a move to test the boundaries of the wider purple one.

Be aware that a gap tomorrow morning could decide next direction for us if it's sustained much beyond amateur hour.

Annotated 30-Minute Chart of the NDX:

Same setup on the NDX. NDX traders need to see sustained 30-minute closes above about 3,740 to set the new potential upside target, at about 3,760-3,770. They need to see sustained 30-minute closes beneath about 3,675 to set the new potential downside target at about 3,627-3,636. Sustained values above about 3,712 or below about 3,695 will only set potential boundary tests for the purple channel without telling much about ultimate direction now that churn has settled in.

Be aware that a gap tomorrow morning could decide next direction for us if it's sustained much beyond amateur hour.

Annotated 30-Minute Chart of the Russell 2000:

We see a similar pattern for the RUT. Churn has settled in. Sustained 30-minute closes above about 1,202 or below about 1,198 serve only to set up potential tests of the boundaries of the purple, 45-ema-based Keltner channels without giving much information as to ultimate direction. The RUT need to sustain 30-minute closes above about 1,213 before it's in breakout mode to the upside again, but we knew that without Keltner channels. Last Tuesday's new high tells us that.

The RUT needs to sustain 30-minute closes below about 1,190 before it sets the potential downside target marked at about 1,170-1,173.

Of course, no one who traded through last Tuesday or much of the last two years can escape knowing what a gap can do, especially an upside gap that traps bearish traders and forces them to buy to cover, fueling the early gains and encouraging real buyers to step in. As those of us in neutral options strategies such as butterflies and iron condors know, gaps and a sharp upside move can be as painful as a sharp downside move. Ouch.

We see from daily charts that the strongest rally patterns have been preserved once again today, and we must honor that observation. However, we should also be aware that there's been a straight-up run off the February lows. The indices have climbed far above moving averages such as the 50-sma or -ema's (or the 45-ema that I watch). It's been a long time since most indices have tested the support at the bottom of their smallest Keltner channels, either.

When I make my what-if plans, I try to build scenarios for either contingency and I urge readers to do so, too. Increasingly, market pundits note the high level of margin debt. That's not a good market-timing tool, but it's a warning that when a real rout starts, it could become ugly quickly. I warn ad nauseum to make sure you're comfortable with the risk in your portfolio, and I'm doing it again. That goes for bears as well as bulls.

Linda Piazza