Futures moved higher overnight, and equities ran up during the cash session, too. When no pullback had appeared by early afternoon, the rally continued with many of our most watched indices closing higher by 1-2.7 percent.
We know it was a relief rally. What we don't know yet is how strong its legs are and whether it's the beginning of something more.
Hours before the open, I looked at the first news headline on Yahoo! Finance. It read, "Fed's Lockhart: No Need for more QE at present." I was surprised to then pull charts to see that our futures were still solidly higher. They didn't appear to have taken a hit on that headline. While many market watchers have felt that a relief rally could occur at any time, I thought that the propellant for any such rally might come from increased hope for more quantitative easing. Dennis Lockhart, a voting FOMC member, appeared to be tempering such hope.
Atlanta Federal Reserve Bank President Dennis Lockhart spoke before the Institute of Regulation and Risk North Asia in Tokyo. His overseas tour continues in Hong Kong tomorrow. Marketwatch's William L. Watts quoted Lockhart as saying that modest progress toward recovery was occurring. Lockhart stated that the U.S. had entered the stage of recovery when "sustained monetary accommodation is warranted in order to preserve and advance what is still modest progress." Perhaps it was that assurance that kept pre-market futures from reacting too negatively to Lockhart's assertion that he doesn't believe that "circumstances [warranting more quantitative easing] prevail at this time."
Those early bargain hunters might also have been more inclined to stick around through the cash market open by an absence of scary headlines from across the pond. This weekend's G8 meeting ended with agreement that growth should be encouraged, reportedly without too many specifics about how that would be accomplished. Doom-and-gloom headlines were harder to locate this morning than is typical lately. "Relief" may have been the key word to today's relief rally.
Asian bourses turned in mixed performances last night, with the Nikkei closing higher by 0.26 percent; the Hang Seng, lower by 0.16 percent; and the Straits Times, higher by 0.40 percent. In their morning trading, European bourses were mixed, too, with the FTSE 100 sharply lower; the DAX, sharply higher; and the CAC 40 zigzagging between sharply higher and flat levels. After our markets opened, those bourses climbed. The FTSE closed the day down 0.64 percent, but well off its day's low; the DAX, up 0.95 percent; and the CAC 40, up 0.64 percent.
Before the market open, the Federal Reserve Bank of Chicago released its National Activity Index, the CFNAI. Bloomberg describes this as "a weighted average of 85 existing monthly indicators of national economic activity." Zero is the benchmark that measures expansion or contraction. Today's reported 0.11 was above the benchmark 0, and the strength was "centered in production which reversed March's slide," said the Chicago Fed report.
While that report might not be watched by many, the headline number at least did nothing that would dampen the pre-market enthusiasm for equities. That April growth was also termed "above trend." However, looking below the headline number wasn't quite as cheery. The prior March -0.29 was revised lower to -0.44. That revision lower ensured that the three-month moving average dropped below the benchmark 0 level, to -0.06.
Story stocks today included Google (GOOG, 614.11, +13.71 or 2.28 percent), again called on the carpet by EU regulators. EU Competition Commissioner Joaquin Almunia wants the company to submit proposals addressing concerns related to its search services, copying of rival content and restrictive contracts that require software developers to thwart the moving of ads to competing services. Almunia gave the company a short time frame for submitting those solutions, a "matter of weeks." After hours, the stock gained $2.39 from the closing price, trading at $616.50 as this report was edited.
China's largest e-commerce provider, Alibaba Group Holding Ltd., paid Yahoo (YHOO, 15.58, +0.16 or 1.04 percent) up to $800 million in new preferred Alibaba stock and $6.3 billion in cash for a portion of YHOO's stake in Alibaba. Although the parameters might not have been known, this was a widely expected move. YHOO had acquired a 40 percent stake in Alibaba in 2005, and this effort will buy back about a 20 percent stake. These efforts are felt to be in preparation for a possible IPO in Alibaba.
Facebook (FB, 34.03, -4.20 or 10.99 percent) remains one of the biggest stories, and Nasdaq OMX Group Inc. (NDAQ, 22.78, +0.79 or 3.59 percent) became a story along with Facebook. As the stock dropped below its IPO price in Monday morning trading, the WSJ was reporting that traders and brokers blame the exchange for mishandling the IPO. They want to be made good for losses they attribute to that mishandling. Finra will likely oversee the arbitration and distribution of funds that the Nasdaq OMX Group Inc. is expected to set aside for the purpose of resolving bad trades.
Thomas Joyce, Chairman and CEO of influential Knight Capital, vociferously criticized the exchange's handling of the IPO, saying that it arguably was the worst handling of an IPO by an exchange ever. Joyce said, "We were trading blind . . . for two and a half hours." Knight Capital thought they were net short at one point and were indeed net long. He complained that Nasdaq knew from the beginning that there were technical problems and went ahead anyway. After the close, FB lost $0.12 from the closing level, at $33.90 as this report was typed. NDAQ dropped $0.03 in after-hours trading and was at $22.75 as this report was typed.
Facebook underwriter Morgan Stanley (MS, 13.19, -0.16 or 1.20 percent) also became a story stock due to FB's decline. Friday, MS of course acted to support FB's IPO price and may have experienced some losses due to those actions. That may have cut into the underwriting fees they collected. Many experts have counseled retail investors to step back and let Facebook settle before taking a position, and some wondered today while the stock dropped hard in early trading if the underwriter was also stepping back. After the close, MS lost $0.04 from the closing value, at $13.15 at one point, but then had climbed $0.06 off the close to trade at $13.25 as the report was edited.
JPMorgan (JPM, 32.51, -0.98 or 2.93 percent) announced that it would maintain dividends but would stop stock buybacks. This occurs in the wake of the recent announcements regarding the momentous derivates-related losses the company will endure. This change constitutes part of the company's efforts to ensure that it can build enough capital to meet the rising requirements of the Basel 3 standards in the aftermath of those losses. After the close, JPM gained $0.09 and was at $32.60 as this report was typed.
Companies reporting earnings today include Campbell Soup (CPB, 32.75, -0.65 or 1.95 percent). The EPS was higher than anticipated, as were revenues. EPS guidance was in line with expectations for the full year with revenue guidance near the lower end of the flat-to-up-two-percent range. The company reported that it was not satisfied with its performance this quarter.
Other companies reporting earnings included Lowe's Companies Inc. (LOW, 25.60, -2.88 or 10.11 percent) and Urban Outfitters (URBN, 26.16, +0.54 or 2.11 percent). LOW dropped due to what was perceived as a miss on sales, particularly in same-store sales, and an outlook that failed to inspire. LOW blamed early warm temperatures for sales that occurred earlier than expected and then didn't meet expectations at the end of the quarter. The company cut its full-year earnings guidance. Some commentators point to the failure of the housing market to rebound as much as hoped. After hours, LOW gained $0.06 to trade at $25.66 as this report was typed.
URBN's report was after the market close. As this report was typed, URBN had gained $1.54 or 5.89 percent from the market close to trade at $27.70 in the first moments after the report was released. First reports were that the company had record sales for the first quarter, beating estimates. Profit fell to $34.00 million from the year-ago $38.6 million, but EPS was $0.23 per share versus expectations of $0.20 a share. Sales rose to $568.9 million, but, according to Reuters, that was lower than the expected $478.7 million. At lest in the first trades after hours, before the conference call, someone was buying.
Let's look at charts.
We've been long overdue for opposing developments: a relief rally was one. The other was either a capitulation day or a long period of sideways movement to burn off the excesses in the market and calm fears of a debacle. We got the relief rally or at least the start of one. Will it last longer?
During last week's decline, the SPX sliced right through all those nice little Fibonacci levels that I had hopefully pointed out. I had mentioned that when the indices had climbed through the zone just below last Monday's levels, they had done so quickly. They had failed to pause and forms handholds or footholds to which prices might cling on a slide lower. The SPX slid almost all the way to the October 27 peak high before it could find any toeholds. Based on that slide and where the index paused, I re-anchored the Fibonacci bracket further back, to the early October low rather than the November one. As I did last week, I'll show the actual bracket on the SPX's chart, but not on the others. I don't want to clutter the charts any more than is necessary.
Annotated Daily Chart of the SPX:
The newly drawn 38.2 percent retracement line nearly coincides with the October 27 2011 peak high. We can see that the newly drawn Fib bracket shows some concordance with the action of the SPX, particularly with the pause in early March and again in early May near 1340.
Will the current rally continue? Keltner channels are just as mundane as the more familiar Bollinger bands. I use them differently by nesting several intervals. They still suggest a potential downside target for the SPX near 1230. According to this evidence, we should indeed consider any rallies now suspect and be alert to the possibility of rollover potential wherever resistance gathers.
Right now, several important (in this setup) moving averages and Keltner channels converge in the first oval above the current levels. The steep decline scattered them a bit, so it's impossible to determine just yet where inside that range the strongest resistance might lie. However, if this rally continues past today, particularly if the SPX should gap up above about 1316 tomorrow, I would watch for potential resistance on daily closes near the (red) 9-ema, currently at 1328.55, and then near the 1340-1342 level, where many types of resistance converge. Those types include historical, moving average, and Keltner resistance. Until and unless the SPX can maintain consistent daily closes above that 1340-1342 level, I would continue to consider rallies suspect and would continue to set up my trades so that they could be defended in case of a strong downdraft.
Being able to "defend" a trade doesn't necessarily mean that you will profit from that trade. As traders, we sometimes will take losses as a matter of course. However, we should position our trades so that we can defend them against ruinous or unmanageable losses. Make a plan for what would happen if the SPX should roll over and be ready to enact that plan if that should happen. That's all I mean. Now let's look at what plans you need to make in case the rally has strong legs.
If the SPX should sustain daily closes above about 1342, then put the 45-ema or 50-sma, whichever you prefer, on your charts, and watch it for rollover potential. If the SPX can sustain daily closes above that, then the most bearish potential has likely been rejected. We'll have to examine charts again if that should occur.
Relief rallies can be rabid, so make a plan for dealing with that possibility, too. For now, however, consider all rallies suspect.
The Dow's move was similar today, with the index charging up to test the same constellation of likely strong resistance on daily closes.
Annotated Daily Chart of the Dow:
For now I would remain suspicious of rallies in the Dow, too. It's possible the Dow could roll down from today's close. However, if the Dow can climb closer to 12620-12642, not a certainty at all, I would watch for rollover potential there. If the Dow can sustain daily closes above that level, I would watch for potential resistance wherever the 45-ema or 50-sma, whichever you prefer, is then located. If the Dow can sustain levels above that, I could consider the most bearish interpretation undone, and we'd have to start over with our assessment of what happens next.
Until then, be able to defend your trades if the Dow rolls lower from one of those resistance levels. Watch for potential support near 12200-12300, but if the Dow drops through that, 12000 and then 11750-11875 remain possibilities.
The NDX's candle, ever one of the leaders, suggested that other indices may indeed charge higher to test those constellations of potential resistance. By the end of the day, the NDX had pushed through the first layer of resistance.
Traditional chartists who watch 200-ema's or 200-sma's will have known that the NDX had mostly balanced on its 200-ema (currently 2490.64)last Friday and the RUT, its 200-sma (currently 753.39). Seeing prices bouncing this morning from those much-watched moving averages probably provided extra leverage to these rally. Shorts who might have waited for a pullback to buy to cover likely were eyeballing the action surrounding those averages, too. They likely gave up at the end of the day and covered, helping to push the NDX and the RUT, too, through the first layer of resistance.
Both those indices tend to overrun support and resistance, however, so I would look askance at an EOD push unless it's maintained in the coming days. If there's going to be a technical bounce, where else would it come from but a test of one of these key moving averages?
Annotated Daily Chart of the NDX:
The NDX has also set a much lower potential downside target, and that potential target remains. I still consider rallies suspect, and I would still counsel traders to be able to defend NDX-related trades if the NDX should roll down through Friday's low and continue lower. Levels of potential support below Friday's low cluster near 2420 and then 2320-2340.
What might be resistance? As today proved, relief rallies can be rabid, so we don't know if resistance will hold any more than we know if support will on get-me-out-at-any cost declines. However, I would first watch for potential resistance on daily closes not too far overhead, at 2560-2580, and then in 10-point increments up to about 2620-2640, a point at which several potential resistance levels of several different types cluster. If the NDX can sustain daily closes above that and then manage to surpass the island top gaps up to about 2673, then the most bearish interpretation of the charts would be undone.
The RUT, like the NDX, pushed through the first layer of resistance on the end-of-day gains.
Annotated Daily Chart of the RUT:
Continue to be wary on this rally until and unless the RUT can maintain daily closes above the 45-ema or 50-sma, whatever your preference. Sustained daily closes above those averages suggest the most bearish potential has been undone. Those closes would also likely bring the RUT back above the neckline of its confirmed head-and-shoulders formation. Until that happens, I would consider any rally a retest of former support to see if it's now going to hold as resistance. I wouldn't consider the rally a sign of strength until it had proven that those levels would not now hold as resistance on consistent daily closes.
Until then, watch for rollover potential at the 9-ema, currently near 771.70, the historical resistance near 785, and then that constellation of potential resistance levels currently from about 789.30-797. Any of these could be resistance on daily closes.
Without scary headlines from Europe, the dollar pulled back. It stopped its descent above its 3/16 peak of 80.76. So far, the pullback might be nothing more than a pullback to test former resistance. Any renewed talk of quantitative easing here in the U.S. would likely send it lower, however, but so far, Lockhart at least was doing his best to support the dollar today, whether that was his intention or not.
Annotated Daily Chart of the Dollar:
Of course, the dollar's pullback today allowed dollar-denominated securities such as gold, crude, and U.S. equities to bounce without the weight of the higher dollar pushing their valuations lower.
Tomorrow's Economic and Earnings Releases
The April Semi Book-to-Bill number will also be reported, but at 6:00 pm ET, after our market close.
Companies reporting earnings tomorrow include AZO (BMO), BBY (BMO), DELL, MDT (BMO), PTM (AFC), and VOD (2:00 am ET).
What about Tomorrow?
Reports that will occur overnight and our susceptibility to any political rhetoric out of Greece or bank scares out of Spain can render anything seen on the intraday charts useless by tomorrow morning. Still, since we don't have crystal balls, let's look at the charts and see what we see. To eliminate as much noise as possible, I'm still using 60-minute charts.
Annotated 60-Minute Chart of the SPX:
During the downturn, the SPX established a pattern of traveling down through the smallest Keltner channel seen here, the grey channel based upon the 9-ema. Furthermore, most hourly closes were below the 9-ema, the central average of that channel. Furthermore, over the last 10 days, all hourly closes were below the 45-ema, the moving average currently at 1321.40 on this chart.
To trust the current change in tenor, the 9-ema should continue to hold as support on 60-minute closes when tested. That moving average is now at 1310.61, but it will of course have moved with any price movement tomorrow. Moreover, I would extend support down to about 1304. Those who want the rally to continue would like to see those levels hold as support on 60-minute closes. A test is coming right up at 1320-1322. If the SPX can get above that on sustained 60-minute closes, the next upside target range is 1337-1345. That range would probably contract, likely toward the higher end of the range, if the SPX continues upward, but historical support/resistance levels may begin to kick in at the bottom of that range, too.
It sometimes happens that indices gap above the nearest resistance at the open. If that should happen tomorrow, be certain that the 1320-1322 level is holding as support on retests before you believe too strongly in that upside potential. If you have bullish gains and the 1337-1345 range is approached, decide ahead of time how you'll handle that test of what could be significant resistance. The next potential upside target is marked on the chart, if that resistance is breached, too.
If the SPX instead rolls over and especially if it rolls through Friday's low, look to the daily chart for potential support levels.
The Dow's setup is similar.
Annotated 60-Minute Chart of the Dow:
The Dow had also been traveling downward within its smallest, grey Keltner channel, with most 60-minute closes at or beneath the central average of that channel, the 9-ema. Today, its tenor changed as the Dow stayed above that central average long enough to turn the grey channel upward again. Those who would like to see the next upside target hit and then exceeded want to see continued 60-minute closes above the 9-ema. That moving average and other potential support on 60-minute closes converges now at and above 12420, so bulls want to see any pullbacks find support there on 60-minute closes if that area is tested.
If the Dow continues climbing, these charts suggest that potential resistance on 60-minute closes may exist near 12,560-12570, although that could get pushed higher in an early morning rise. If the Dow can sustain 60-minute closes above that level, which is the 45-ema, then the next potential target is also marked on the chart, now at about 12700-12760.
If the Dow rolls over instead, and especially if it rolls down through Friday's low and doesn't quickly bounce back, look to the daily chart for potential targets and support levels.
The NDX has already led the way to its 45-ema on the 60-minute chart.
Annotated 60-Minute Chart of the NDX:
The NDX showed more strength by climbing right to its 45-ema. Normally when any of the central averages of these Keltner channels is tested after a decline, it's time for a pullback. This can be seen from the many times the red 9-ema was tested, for example, these last ten days of trading. Normally, only when support then holds on retests does price then steady and climb toward the top of the channel.
This means that in normal times, it would be time for the NDX to pull back and test next support to see if holds. That support would be at the red 9-ema, now at 2531.02, but likely to have moved after the first trades tomorrow morning. If such a pullback occurs, bulls would like this first level of support to hold on 60-minute closes. However, if the support doesn't hold, next support appears to be clustering near 2505-2514, with that range likely to tighten toward the lower end of the range if the NDX pulls back first thing tomorrow morning. A failure of that support would suggest that last week's low could be tested. If that should fail as support, turn to the daily chart for next targets and potential support levels.
I talked about what happens in normal times. Prices don't always behave in normal manners, and the NDX in particular doesn't always behave as expected. If the NDX gaps up tomorrow morning and only then pulls back, watch for support at the 45-ema or the 9-ema, if that average has also climbed higher. If those averages hold as support on 60-minute closes, look for potential resistance next at 2580-2593.
The RUT didn't quite make it up to its 45-ema, but it came close.
Annotated 60-Minute Chart of the Russell 2000:
The RUT's setup is like the NDX's, and the same suggestions apply. In normal times, it would be almost time for a pullback, and bulls would hope to see support hold where support converges from about 755-760. If not, there's risk of a retest of last week's low. If the RUT should drop below that and not immediately bounce, look to daily charts for next targets and potential support levels.
If the RUT gaps higher, above the 45-ema now at about 766.75, bulls want to see that moving average serve as support on 60-minute closes. Doing so sets up the next potential target and resistance zone at 777-782.
What do I think? I'm trying just to watch without too much of an opinion about what will happen next. Having too strong an opinion can compel us to lean too much in one direction in our trades and ignore moves that are opposite our views. We "just know" the markets will turn around. Big money is testing, and big money will decide, not us retail traders.
For now, I think it likely that the equities are just seeing the expected relief rally. I think those relief rallies can carry all the way up to 1337-1345 on the SPX, 12700-12760 on the Dow, 2580-2600 on the NDX and 777-782 on the RUT. I think it's equally likely they'll keel over any moment and barrel through last week's lows. I'm preparing for either eventuality. That's what this relief rally is all about: telling us which is most likely.
For now, though, I stick with that term: until proven otherwise, it's a relief rally. I was relieved to spend at least one day not thinking doom and gloom, and I hope you were, too.