If we had a Sophocles among us, overseas economic developments would certainly provide the material for an engaging and dramatic play. When writing about Oedipus, Sophocles understood the need for a back story. If we're to catch each nuance of tension building in our markets, we must know something of the back story, too. Let's get to it.
As has become typical, overnight developments in Asia and Europe provided the back story driving U.S. equity futures. First appearing on stage last night were members of Greece's government. Greece's finance minister Yannis Stournaras headed toward a Monday meeting of Eurogroup finance ministers. Greece's newly formed coalition government seemed caught between the proverbial rock and the hard place, and their predicament showed as they spoke.
If we sometimes have to hear between the spoken lines in a play, we also have to do so when listening to or reading pre-meeting declarations. Speaking Sunday, Stournaras clearly addressed two separate audiences: the citizens of his country and the broader EU audience. He tried to placate both. First, he endeavored to temper citizen's expectations that the austerity terms could be quickly overhauled. He also promised that structural reforms and privatizations would be quickly put into place, clearly addressing the broader EU audience. Prime Minister Antonis Samaris stepped forward, too. He said that the new coalition government did not want "to change the targets of the bailout but that which is causing recession and hampering" the country from meeting those goals. While I'm not certain that statement provided much reassurance to Troika members, it was enough to inflame Syriza leader Alexis Tsipras, who labeled Samaras's conservatives "Merkelists" in a speech before the parliament.
The scenery changed as the night progressed. Other overnight developments included disappointing or concerning results in Japan's Current Account and Core Machinery Orders as well as China's CPI. Anecdotal evidence and some of these numbers suggest that China's exports of Christmas-related items are suffering. The steep drop in China's CPI perhaps opens the door for further easing, if deemed necessary, while also raising the specter of deflation, so it was a good news/bad news type of result.
The next scene played out upon the same stage. Asian bourses traded for the first time since our disappointing non-farm payrolls and their own disappointing data. The Nikkei 225 closed lower by 1.37 percent; the Hang Seng, lower by 1.88 percent; and the Straits Times, lower by 1.66 percent. China's Shanghai Composite Index dropped 2.37 percent. Later, at 1:00 am ET, Japan's Economy Watcher's Sentiment was to drop to 43.8, well below the 47.6 prediction.
The scene switched back to Europe. Germany's trade balance dropped to 15.0B, well below the prior 16.2B and the anticipated 15.7B. Sentix reported its Eurozone Investor Confidence at -29.6, much worse than the anticipated -26.3. Although still well off its 2008 and 2009 lows of -42.3 and -42.7, this number moves the wrong direction. If Dr. Doom is to be believed, those numbers will get worse.
Yes, Nouriel Roubini stepped to the front of the stage, the play's narrator and interpreter who is also known on the world's stage as Dr. Doom. He warned this weekend and this morning that the conditions he thought most threatening in May are indeed unfolding. He pointed to China's CPI last night as one element of those conditions: a slowdown in emerging markets with China's being one of the most concerning. He intoned his assertion that central banks will not have the tools needed to defend against such a perfect storm of elements that he believes will hit in 2013.
Enter the rest of the European players. European bourses opened. The yields on Spanish 10-year bonds climbed back above 7.00 percent. The European Commission rushed onto the stage. Their spokesperson hastened to assure market watchers that Spain can receive help from the EFSF, the European Financial Stability Facility, until the ESM, the new European Stability Mechanism that can recapitalize banks directly, is available. An article appearing in Market News International quoted the EU leaders' clarification that the ESM will not take senior creditor status. Banks that the ESM directly recapitalize will not need to produce sovereign government guarantees. These comments, too, seemed to be directed at the situation in Spain. Yields on the 10-year notes did seem to respond, pulling back slightly after the European Commission clarified these issues, but they closed at 7.062, up 0.10800.
Others played bit parts in the first act of the production. The Bank of England's Paul Tucker testified before the House of Commons Treasury Committee. He was alleged to have directly interfered in the setting of LIBOR rates. Tucker was expected to explain a 2008 phone call as well as emails he sent to Bob Diamond, with some who have read the emails alleging that he was nudging Barclays in order to directly manipulate LIBOR rates. He was asked whether government ministers had leaned on him to urge banks to manipulate interest rates. Tucker "strongly denied" those allegations, David Milliken and Steve Slater reported in an article for Reuters. Sophocles would have needed strong editing skills to condense all this material into a single play.
European bourses had opened near the flat line. They headed lower and then recovered some of the day's loses just before the U.S. markets opened. They, too, might have been responding to the clarifications coming from the EU commission about Spain's banks. The FTSE closed down by 0.62 percent, never managing to regain the flat-line level. Both the DAX and CAC 40 zigzagged back and forth across that flat-level throughout their afternoon trading sessions, with the DAX closing lower by 0.35 percent and the CAC 40, but 0.38 percent.
Another scene switch refocused attention on the U.S. Our markets opened on the start of our earnings season. Before Alcoa (AA) announced its after-the-close earnings, however, we had an entire day of trading, a day that started out weak and ended with major indices lower on daily candles that indicated indecision about next direction.
Late this morning, President Obama stepped onto the scene. As expected, he called for a one-year extension of some of the Bush-era tax cuts for the 98 percent of families and 97 percent of small businesses earning less than $250,000 a year. He acknowledged the Republican stance that the tax cuts should be made permanent for all Americans and businesses but said that he disagreed with that position. He offered specific reasons, but all our readers will have long since formulated an opinion either in favor of President Obama's proposals or against them. What's important for the purposes of this page is that this is the opening salvo in what could turn out to be another contentious time in the U.S. President Obama pointed out that both Democrats and Republicans wanted to see the tax cuts continue for this specific group of people and businesses earning under $250,000, and that the only differences lay in whether it would be extended for higher earners and for a longer period of time. He plead, "Let's agree to do what we agree on."
That may not happen. All appear to agree that letting the tax cuts expire completely could weaken the economy, but that specter may not present enough of a common ground to avoid a battle and a threat to let that happen.
A number of FOMC members spoke across the globe, too, but didn't seem to garner as much attention for the parts they played. Those speakers included Boston Federal Reserve President Eric Rosengren at the Sasin Bangkok, participating in a forum on "Asia in Transformation." At 1:00 AM ET, Chicago Federal Reserve President Charles Evans spoke on monetary policy and current economic conditions, also in Bangkok. At 11:55 AM ET, San Francisco Federal Reserve Bank President John Williams spoke in Couer d'Alene, Idaho, speaking before a convention of bankers. Those who would like to read Williams' speech in its entirety can find it here. In this speech, Williams offered a summation of the plot and actors in the drama that currently engages the world, so you may find it worth reading. Williams characterized the progress toward higher employment as occurring at a snail's pace. He lowered his growth forecasts through 2013. However, he may have squashed hopes related to QEIII, since he tagged asset purchases as the most effective tool for the Fed in the current circumstances. He doesn't believe that the recent extension of Operation Twist will have a marked effect.
At 3:00 this afternoon, Consumer Credit surprised by coming in at $17.1B. Market watchers had forecast an $8.5B increase, up from the prior $6.5B, but even that prior number was revised higher to $10.0B. The consensus range was quite large, at $5.0B to $15.6B, but the number was higher than even the highest guess. The prior report, April's, demonstrated softness in non-revolving credit, indicating that it was the large jump in student loans that had created the increase. The May report showed all types of credit higher. Some market watchers believe this increased consumer credit equates to improved confidence and readier availability of loans.
Mergers and acquisitions announced today include Wellpoint's (WLP, 61.95, up 2.04 or 3.41 percent) acquisition of Amerigroup Corp.(AGP, 88.79, up 24.45 or 38.00 percent) in what some analysts termed a big Medicare/Medicaid play. WLP will pay $4.46 billion cash or $92/share, a hefty 43-percent premium to Friday's close. This acquisition gives WLP a Medicaid presence in 19 states. WLP said the acquisition would be accretive to its earnings per share as soon as 2013. The company did not change its 2012 forecast.
Campbell Soup Co. (CPB, 32.72, down 0.27 or 0.82 percent) also announced that it had finally succeeded in buying Bolthouse Farms from Madison Dearborn Partners LLC. CPB had attempted to buy Bolthouse Farms previously. The company makes baby carrots and refrigerated salad dressings but is probably best known for high-end juices and other drinks. The acquisition expands CPB's stance in packaged fresh foods. CPB expects the acquisition to boost earnings in fiscal 2013. The president and chief executive will stay with Bolthouse, which will be operated as a separate business unit.
Story stocks included Boeing (BA, 74.03, up 0.34 or 0.46 percent). The company announced a deal to sell 75 737 MAX aircraft to Air Lease. The UK holds its biennial Farnborough air show this week, with that air show producing deals and headlines. Northrop Grumman (NOC) elected not to attend this prestigious air show this year due to cost-reduction goals the company has set. The company's representatives will instead attend air shows in the Middle East and Asia.
Sirius XM Radio (SIRI, 2.08, up 0.03 or 1.47 percent) gained after increasing subscriptions by 322K in Q2. The stock had a range of $2.05-2.12 today. Not so happy news saw Visa Inc. (V, 123.65, down 1.63 or 1.30 percent) and MasterCard Inc.(MA, 431.27, down 10.36 or 2.35 percent) moving lower after UBS AG downgraded the stocks in their space. Ahead of its earnings report on Friday, Wells Fargo (WFC, 33.26, up 0.21 or 0.64 percent) was started at Jeffries with a high rating and a price target of $39.00.
The earnings season began today with Alcoa's (AA) earnings report after the market close. As I scanned headlines after the report, I saw mixed reactions: "Alcoa Rises on Revenue Beat," "A Slight Loss as Sales Dip," "Alcoa's quarterly profit plunges," and "Aluminum Giant Alcoa Beats Expectations, Sees Global Demand Growing 7 Percent." What a mixture. What's the truth? The company did report a net loss for Q2 of $2 million or "nil cents per share," as a Reuters article termed it. Barron's reported 6 cents, in line with expectations. However, the year-ago quarter, the company produced a net profit of $322 million or 28 cents per share. Yes, profits did plunge. However, revenue at $5.96 billion beat forecasts of $5.82 billion, so that headline was correct, too. The company does believe that global demand will grow 7 percent in 2012 while there would be a deficit of supply of aluminum. Overnight, we'll have to see if market watchers agree with that assumption of growth in global demand.
Let's look at charts. Last week, we saw the validation of the small rising regression channels on the daily charts. By late last week, many indices were beginning to roll down from approaches to the top of those rising regression channels.
The SPX didn't quite reach the top of its rising regression channel before it turned lower again. A sign of waning strength?
Annotated Daily Chart of the SPX:
When the SPX trends higher, it tends to do so on the back of a rising (red) 9-ema, with daily closes at or above that 9-ema. The SPX closed near that moving average Friday and again today. Those with bullish hopes would have liked to have seen a strong rebound above that moving average today. Today's small-bodied candle indicates indecision. That kind of candle can precede a bounce but the longer indecision goes on, the more likely it will be that price will drop toward next support instead.
Consistent daily closes above that moving average support the possibility that the SPX will rise toward 1373-1375 or perhaps even 1394-1397. Consistent closes beneath that moving average instead set up the possibility of stepped moves lower, with 1330-1342 providing potential historical and Keltner support. That's a broad range, but the 60-minute chart we'll examine later suggests that a drop much below 1340 for more than a couple of hours could be significant.
It could at least be significant enough to drop the SPX down to the 1330 zone. A drop beneath that support that persists more than a couple of hours or through a daily close sets up the potential for a decline to the bottom of the rising regression channel. Those with bullish hopes want this support to hold on daily closes. Breaches of that channel support on daily closes set up the impression that this rising regression channel has been nothing more than a bear flag formation. That increases the possibility of a drop toward 1280-1286, although I would certainly be watchful of bounce potential at the 6/22 and 5/18 lows.
If the SPX should stair-step lower but find support and rise before reaching the bottom of the rising price channel, be aware that it might not have completely recharged. It might roll down again when it hits former potential support. In other words, if the RUT falls to 1332 tomorrow but then rises to 1352 the next day, be watchful of rollover potential.
The chart configuration suggests that the SPX is ready to drop toward 1340 and perhaps even 1335. Whether the SPX actually does so or what happens once that test occurs are dependent on outcomes we can't predict. That depends on which characters appear next on screen and what they have to say.
I set up this possible drop-to-1340 or perhaps even 1335 scenario for the SPX before studying the Dow's chart. When I did turn to the Dow's chart, I discovered that the Dow was already dropping into that support level analogous to the 1332-1336 level on the SPX. The Dow, then, may offer a preview of what might happen with the SPX.
Annotated Daily Chart of the Dow:
Like the SPX, the Dow did not reach the top of its rising regression channel before heading down again, potentially a sign of waning strength. Like the SPX, the Dow dropped through its (red) daily 9-ema, and needed to scramble back above that moving average quickly to avoid setting a lower target. The Dow did not manage to scramble above that level by the close. That lower target zone for the Dow is now about 12660-12690, as long as it maintains daily closes beneath the turning-lower 9-ema.
If the Dow should drop into the next target zone near 12660-12690, it would need to hold at or above this level on consistent daily closes to avoid setting up a possible retest of the rising channel's bottom support line. If such a test should occur, those with bullish hopes want to see that channel's support hold on consistent daily closes. A breach of that support that endures more than a couple of hours or through a daily close suggests that the channel was just a bear flag formation, and a lower target near 12225 hold potential.
If the Dow does maintain daily closes above the support zone it tested today and can also maintain daily closes above the red 9-ema and particularly above the midline of the rising regression channel, now at about 12815, it sets potential upside targets of 12965-12980 or even at the top of the rising price channel. Just as bears must watch for bounce potential at each potential support level, bulls should watch for rollover potential at each of the marked potential resistance levels.
The NDX turned lower before hitting the top of its rising regression channel, like the Dow, but its chart displays a little more strength with regard to the (red) 9-ema. The NDX formed a doji right at that key moving average.
Annotated Daily Chart of the NDX:
If the NDX can maintain those daily closes above the 9-ema, it sets a potential next upside target near 2660. That will constitute a retest of the 7/5 high, so historical resistance joins potential Keltner resistance there. If the NDX can get past that resistance, a next potential target is at the top of its rising regression channel, where that channel's potential resistance joins gap and Keltner potential resistance from 2686-2715.
If the NDX instead rolls lower, perhaps from the midline of the rising regression channel, it risks a drop toward 2588-2590 where potential support might be found on daily closes. If that potential support doesn't hold, then the NDX may also see an all-important bottom-of-the-channel test, too. As with the other indices, it's important that the NDX find support at or near the bottom of that channel (daily closes above 2555, according to the Keltner channels). Otherwise, the rising regression channel looks like a bear flag, and that would set up the possibility of a drop toward 2460-2490, with lower potential targets marked, too.
The NDX looks a little stronger than the Dow did when comparing various Keltner and regression channel setups. That can perhaps be related to how the stocks in different indices respond to economic stresses or hints of more easing. For example, the small caps that comprise the Russell 2000 stocks tend to be more sensitive to interest rate discussions since these smaller companies pay more for their loans.
Was that sensitivity the propellant behind the RUT's outsized response to the temporary possibility of QEIII last week? Perhaps. Whether that was the reason or fund managers decided it was time to reallocate, the RUT's chart appears much different than those of the other indices. As discussed last Monday, the RUT broke out of its rising regression channel. It set a tentative upside target at an upper Keltner boundary, and it in fact hit that Keltner target last week before turning lower. By today, it had drifted down to retest the top of that former regression channel in which it had been rising before the upside breakout.
Annotated Daily Chart of the RUT:
As it tests that rising regression channel's upper boundary, a test that will help determine if that former resistance is now support, it also retests the (red) 9-ema. Bulls want to see daily closes at or above both the 9-ema and the upper channel boundary. A fall back inside that channel would prove disappointing to those who had bought the breakout and would provide a quick view of how weak or strong those hands were that bought the breakout. If those were fund managers staking out new long-term positions in small caps, they'd be more likely to buy this test than to sell it. Weak hands will be more likely to dump Russell 2000 stocks if that support is pierced.
A bounce here sets up a retest of last week's high and potential Keltner resistance near 823-825. The RUT would have to produce consistent daily closes above that Keltner level in order to set new upside targets, including the one marked on the chart.
If the RUT falls back inside that rising regression channel, disappointment may drive the RUT down to the 780-785 zone where Keltner and historic potential support levels converge. If that support is lost on consistent daily closes, a new rising trendline that I haven't yet added to the chart crosses at about 770, and that might be a next level of potential support. However, the Keltner setup suggests that once 780-782 is lost, the RUT could tumble all the way down to 742-752.
Across the globe, we're seeing some safe-haven plays, with several European countries now showing negative yields. Today's story focused on France, saying that short-term bonds had been sold at negative interest rates. Another headline read "Netherlands Poised to Join Germany in Negative Yield Club." The article noted that Finland's two-year yields were only 0.05 percent. The U.S. dollar has been the recipient of some of the safe-haven moves, having bounced strongly off last week's low. While cash indices were producing small-bodied candles at support, the dollar was doing so at resistance.
Annotated Daily Chart of the Dollar:
Tomorrow's Economic and Earnings Releases
Some of tomorrow's scheduled economic events include the following:
ECOFIN is the Economic and Financial Affairs Council. Economics and finance ministers from 27 EU member states comprise this group. They often work closely with the president of the ECB and the European commissioner for economic and financial affairs. Budget ministers are often included in the meetings when necessary.
Tomorrow's earnings schedule remains light.
What about Tomorrow?
Daily charts provide an overview of what's happening. The 60-minute charts often help us set up if/then scenarios for the next trading day. While chart setups are not always as predictive as they once were, they still can benchmark those times when markets are behaving as we expected and when they're not.
For example, a glance at the SPX's 60-minute chart shows us that the SPX trended lower for the last two trading days beneath a declining (red) 9-ema. We have our first benchmark. Nothing has changed in the recent tenor of trading until and unless the SPX produces consistent 60-minute closes above that 9-ema. It did manage a single close above it in an end-of-day push this afternoon, but that's not enough confirmation yet.
Annotated 60-Minute Chart of the SPX:
As long as consistent 60-minute closes are below that 9-ema, the SPX maintains a lower target, in the 1343-1345 range. We can also tell by the convergence of support lines underneath the current price and resistance lines above it that the SPX is in a noisy zone where support and resistance seem roughly balanced. We don't know which will break first. The absolute minimum for any convincing breakout would be consistent hourly closes below about 1344 or above about 1353. However, I personally will not trust such a breakout until consistent hourly closes are below 1339-1340 or above 1354 and maybe even 1356 on the upside. If such breakouts occur, the next potential targets are marked.
It will of course be noted that there's a whole lot of space between the downside benchmark of 1339-1340 and the next potential downside target. Such targets are difficult to deem realistic. However, if you scan across to Friday of week before last, toward the center of the chart, you can see that the SPX had already made a large gain when it broke above an important Keltner channel that was then at about 1343. At the time, the next potential upside target was way up at about 1364, a seemingly hard-to-reach upside target when the SPX had already gained so quickly. The SPX very nearly reached that upside target that day, and it certainly did reach and even exceed it by the early part of the next week.
Sometimes when there's such a large gap between a benchmark and the next target, the move between them proves rapid. That's not always true, but I've watched similar movements occur too often to completely discount them, either. If the SPX forms consistent 60-minute closes beneath that 1339-1340-ish level, I would not count on that lower benchmark being reached, but neither would I discount that possibility. If the SPX were to break down, one additional and unmarked possibility for a support would be a rising trendline drawn from the 6/4 low, touching the 6/28 and 6/29 lows. That crosses at about 1326-1327. It is a trendline that even the most neophyte technical analyst can draw, and so it will be watched, and its support might be bought.
While the Dow's chart is similar, the "noisy" zone and breakout benchmarks are not as clearly demarked.
Annotated 60-Minute Chart of the Dow:
The Dow also descends beneath a falling 9-ema. As with the SPX, the late-day push closed the last 60-minute candle just above the 9-ema, but that is not enough evidence to say that consistent 60-minute closes are occurring above that moving average. Nothing has yet changed in the tenor of the recent trading, although that close of course gives us a heads up that the Dow might be attempting to move up toward the next upside target.
As with the SPX, support and resistance lines converge above and below the Dow's current price. However, the convergence isn't as well formed. In cases such as this, we sometimes see price move about erratically without the import being decipherable. If I were looking at this chart, I would have to see the Dow produce 60-minute closes above 12768-12775 or below 12688 or maybe even 12650 before I would trust a breakout in either direction. The next potential targets are marked.
If a break is to the downside, a rising trendline can also be drawn on the Dow's chart, crossing near 12585 today. Even if that lowest downside target is set on the Dow's 60-minute chart, I would watch that trendline cross for potential support. Others will be watching it, too. Unless the Dow barrels through that trendline, some hopeful bulls might choose it as a spot in which to step in with longs.
The NDX's chart looks similar to the SPX's.
Annotated 60-Minute Chart of the NDX:
The NDX trends lower, with most but not all 60-minute closes at or beneath the peach-colored 45-ema. Those closes are also near the 9-ema. It doesn't look as if the NDX has convincingly cleared that resistance, while it also looks to be attempting to do so. Bands of potential support and resistance converge above and below the current prices, with both looking about equally strong. In that kind of setup, it's difficult to impossible to predict whether the break will come to the upside or the downside, so everything between about 2592-2612 is just noise. I would have to see sustained 60-minute closes above about 2612 or below about 2586 before I believed too strongly in a breakout either direction. Next potential targets are marked on the chart if such a breakout or breakdown should occur.
Because the RUT broke out of its rising regression channel on the daily chart and hit its daily Keltner upside target before starting a strong pullback, I've snapped a Fibonacci bracket on its 60-minute chart to help determine benchmarks and targets.
Annotated 60-Minute Chart of the Russell 2000:
The RUT has also been trending down under its descending 60-minute 9-ema. It's also now trapped between converging support and resistance, although its "noisy" zone is so tight that the RUT will likely soon break out one direction or the other. Since the RUT tends to lead the way either direction, that makes sense.
I would not believe too firmly in a breakout either direction unless the RUT produces consistent 60-minute closes above about 806 or below about 801. The next potential targets and subsequent other targets are marked on the charts.
If the Keltner setup is ignored and the Fib brackets studied, we see that the RUT fell beneath a 23.6-percent retracement of its rally off the 6/26 low and then seemed to find resistance at that Fib level. That's suggestive that unless bulls can drive the RUT above the 23.6-percent level early tomorrow, the RUT might need to drop back to the 38.2-percent level, at about 796-797. (Of course, it's at a specific, calculated level, but this is a snapped chart and my fine motor skills are not always great.)
A sharp move lower may drive potential Keltner support levels closer together but not all readers will have or want to have Keltner setups on their charts. The Fib brackets are available on most charting services, however, and are closely watched by many market participants, so can help to set potential downside targets as one is hit and its support either holds or collapses.
If the RUT should be driven higher tomorrow morning and can maintain values above about 805-806, watch for a target near 809-811, where Keltner and gap resistance may come into play. Sustained breakouts above those levels may suggest a retest of last week's high.
When I look at these 60-minute charts, I see roughly formed head-and-shoulders formations on some. While I never count on such formations being predictive of price action, they do show me something about the underlying sentiment, and it hasn't so far shown strength since about Tuesday of last week, despite the rally that was still finishing. Here's how I approach such formations: I let them warn me, but I'm also forewarned that if such a formation is rejected--by price action that rises too high to be a legitimate right shoulder, for example--prices sometimes explode higher as surprised shorts rush to cover.
Whether you trade the RUT or not, put it on your radar. Its daily chart shows it to be on the edge of either confirming or refuting its break to the upside out of its rising regression channel. Bulls don't want to see a move back inside that channel, which would occur if the RUT breaks much below today's lows. However, it will be the reaction to such a test that will give you information. If the RUT opens lower but then suddenly gains steam and bursts back above the rising channel's support, that will tell you that bulls are still ready to buy on pullbacks.
I would also definitely put the BIX on my radar screen. The BIX has already fallen all the way back through its descending regression channel and is ready to either bounce back above it or break down below it. This financial-related index could give us a heads-up, too. A BIX that stays much below today's low of 152.32 coupled with a RUT that stays below today's low would be confirmation of weakness.
It looks to me as if some others of these indices are ready to follow the BIX and pull back through those rising channels and test support. However, if Sophocles were still among us, he might have some new plot element yet to be revealed. All it takes is another plan to make a plan to undo that possibility and substitute a rush up to test the top of those channels instead.