Market Internals


Today's early market action promised to be worth watching from the get-go. Experienced market watchers likely expected the typical Monday-after-option-expiration-week jumble in early trading as big money and small-potatoes investors both rolled into new positions. Much of the investing world awaited AAPL's conference call detailing what they plan to do with a their hefty war chest of cash. We had an important economic number due, and Europe's calendar was filled with important dates all week. Today's event was the auction of the credit default swaps on Greek debt, destined to take place in late morning ET.

U.S. futures had trended down during the Asian session, with Asian bourses ending with mixed performances. The Nikkei managed to stay above the flat-line level, but the Hang Seng lost 0.95 percent and the Straits Times, 0.68 percent. After a steep early decline in Europe, the FTSE 100 powered off its lows while the DAX and CAC 40 coiled. U.S. futures traders seemed to breath a sigh of relief, bringing the U.S. futures off their lows but still negative as the open approached. European bourses were to end the day down 0.07 percent for the FTSE 100, down 0.05 percent for the DAX and down 0.47 percent for the CAC 40.

This weekend, Germany's Der Spiegel interviewed PIMCO's chief executive, Mohamed El-Erian, about the Eurozone situation. Newspapers across Europe and the U.K. discussed the interview, and finance ministers in some countries reacted to it. Germany's finance minister allegedly asserted that Greece's debt crisis and subsequent bailout were "completely unique." In an article in The Telegraph Monday, released during our futures' overnight session, El-Erian disputed that assertion. The article quoted Mohamed El-Erian warning of a "second Greece" in Portugal. Moreover, El-Erian warned that the Greek deal will unravel quickly. Greece's leaders were telling a different story, with temporary prime minister Lucas Papademos characterizing the country as having traversed halfway down the path to economic recovery. He predicted positive growth rates in less than two years. All this took place with that Greek CDS auction looming in the background, with the auction due to take place at 3:30 pm London time or 11:30 am ET here in the U.S.

Meanwhile, AAPL investors were waiting with bated breath ahead of AAPL's planned conference call to discuss what the company is going to do with its $97-98 billion in cash and securities. Steve Jobs had purportedly opposed a big dividend distribution, preferring to accumulate cash for possible acquisitions and other company needs. Market watchers speculated that the company needed to reconsider that stance. As Jim mentioned this weekend, investors have been buying up AAPL stock in hopes of receiving a piece of a big dividend pie and might have dumped it if they had been disappointed.

The announcement came pre-market, although the conference call was not completed until after the markets opened. I was watching the e-minis as the initial announcement was released. They didn't appear to react much. A small decline was quickly reversed. AAPL gapped higher during early trading but trended off its highs during the conference call. AAPL announced a quarterly Q4 dividend of $2.65 a share as well as a $10 billion stock buyback plan. Before the conference call, print and TV commentators were characterizing AAPL as keeping its war chest, and some print and television commentators mentioned immediately afterward that some investors had anticipated a bigger dividend in the realm of 2.5 percent rather than the about 2.0 percent they calculated that it might be.

Monday's Developments

AAPL's conference concluded after the market open. The dividend amounted to 1.8 percent based on fourth quarter results. AAPL asserted that the dividend and stock buyback left plenty of funds for the company to run its business and pursue strategic opportunities. The company has "plenty" of products in the pipeline, the company affirmed, perhaps hoping to head off the "Apple fatigue" some commentators are beginning to predict. Not all AAPL enthusiasts expect that fatigue to hit. Before the announcement, an analyst with Wedbush set a new target of $750.00 for AAPL. AAPL closed at 601.10, up 15.43 or 2.64 percent, its highest close and near the early morning high of 601.77

Here in the U.S., our only economic release for the morning was the NAHB Housing Market Index at 10:00 am ET. To obtain the data used in this diffusion index, the NAHB surveys about 900 home builders about their current and future single-family home sales. The number 50 is the demarcation between favorable and negative outlooks. Experts had forecast a rise to 30, but instead the index dropped to 28.

The NAHB's headline characterized this as an "unchanged" number, but that's only unchanged because the February number was revised lower. This was actually a drop from the prior reported 29. Builder expectations, the "HMI component" of the number, did rise for a straight sixth month. Despite pointing out limiting conditions such as tight credit and high inventories of distressed properties, the NAHB insisted on casting the number in a good light, pointing out that "[b]uilder confidence is now twice as strong as it was six months ago," with the West the only region that experienced a decline. That decline was a whopping 10 points, however, lopping off half the gain from the previous month. Anyone who would like to read the complete report can find it at this link. However sunny the casting of that report, the $DJUSHB, the Dow Jones U.S. Home Builder's Index, dropped heavily in the moments after the report. Although it climbed off its low of the day, it closed lower, clinging to potential support.

At about the same time the Housing Market Index was being released and the results of the AAPL conference call released, another development was occurring. BAC hit $10.00, doubling the value it held on December 19, 2011. BAC investors initially reacted as if the price had hit an electric fence, sending the stock lower. It steadied just under $10.00 and was inching back up again when rumors of a secondary offering hit the airwaves. BAC rolled over again, closing at $9.53, near the day's low.

As the time for the Greek CDS auction approached, dealers were setting an initial value of 21.75 percent of face value, a Bloomberg article by Abigail Moses noted. That price would leave the sellers of those credit default swaps on the hook for 78.25 cents on the euro. More than Greek debt was on the line with this auction. As Jim Brown has noted, the whole workability of credit default swaps was at stake. With much risk remaining in Europe, any sense that the whole process has failed could be disastrous.

The final value settled upon for the Greek bonds was 21.5 percent of face value, less than the 21.75 percent initial setting. Many market watchers thought that markets would steady or bounce after the announcement as some of the worst or at least most immediate fears of counterparty defaults were eased. Some market watchers exulted that the CDS had been proven to be a functioning hedging tool. That remains to be seen with Portugal following in Greece's footsteps.

We did see U.S. equities bound up again after the auction was completed, but it's my personal belief that something else was at least equally responsible. Federal Reserve Bank of New York President William Dudley, a voting member of the FOMC, was busy, and the markets were paying attention to what he had to say. He spoke about the economy before the Long Island Association in the morning, taking questions, and then participated in a panel discussion at the Brookhaven National Laboratory in the afternoon. Bloomberg's economic calendar also noted that Dallas Federal Reserve Bank President Richard Fisher spoke in London at the Centre for the Study of Financial Innovation. At least one of those talks OF Dudley's may have impacted bond markets, sent the dollar lower and added to the equity euphoria.

Bond market commentators pointed to Dudley's take on QEIII as contradicting Fisher's, driving treasuries lower when he suggested that the Fed hadn't made a final decision about QEIII. Fisher's comments indicated that no one thought it would be needed, at least at present. I wonder if some market participants heard QEIII and little else, because the equity market euphoria certainly acted that way. Puzzlingly, long-term yields such as the ten-year (TNX) and thirty-year (TYX) weren't echoing the usual sentiment seen when the dollar dives and equities climb. They rose, too.

Story stocks included BRCM, rising after the U.S. District Court for the Central District of California granted the company's request for a permanent injunction issued against ELX products that infringed upon two BRCM patents. Both patents have sunset periods during which ELX will be allowed to fill already placed orders of those products. ELX will have to pay BRCM royalties on those sales. In other stock-related news, UPS and TNT Express agreed on UPS's all-cash offer for TNT Express. A company that wishes it weren't included in a list of story stocks is BA. Wing problems with competitor Airbus are deemed worse than had been previously reported, and BA will also be watched closely for similar problems. A final list of story stocks should include ADBE, dropping sharply in after-hours trading after reporting earnings; ADGF, up today after it agreed to be acquired by a unit of Germany's Adidas, and DPZ, up after the issuance of a special dividend and completing a recapitalization plan.

Let's look at what charts have to say about this strange Monday.


The SPX continues climbing along a Keltner channel boundary. The center of that channel is the 9-ema. The SPX's typical rally pattern with respect to this channel and this boundary is that the SPX bounces up hard from a test of the 9-ema, as it did on March 13, then trades for about 5-7 days in small-bodied candles that go either sideways or sideways up. Then it either dips hard to the 9-ema or flattens while the 9-ema catches up underneath it. The SPX has been following that pattern again.

Annotated Daily Chart of the SPX:

The SPX tacked on more gains today, having cleared 1400. It maintains a potential upside target in the 1440 range and will do so as long as it maintains daily closes above about 1390, but it's looking like time to flatten or dip back to the 9-ema again. In this kind of market environment, when markets are blown one direction or another by a quoted hint or the results of a single bond auction, anything can happen. Traders need to be able to defend trades if the SPX heads straight up to the 1440 zone and if it drops down to 1400, where we can presume round-number support lies; 1390, where stronger potential support lies, or even to 1375-1377. Any of those seems possible before the next Monday report. I continue to warn that with the volatility indices where they are now, we must be prepared for a strong pullback at any time, but bears should be warned that the SPX is so far still following its bullish pattern.

The Dow's chart appears different than the SPX's. Like its sister index, the transports, the industrials produced a small-bodied candle indicative of indecision, with spiky little candle wicks or shadows above and below the candle body. These indices just weren't joining the RUT's, NDX's and BIX's party today. Someone forgot to invite them.

Annotated Daily Chart of the Dow:

It looks as if the Dow and the transports (not shown) both may have already begun tipping over toward a retest of the 9-ema and next channel boundary's support. If a retest does occur, bulls would like to see the Dow continue to find support on daily closes at or above about 13,125, the level to which the 9-ema might get pushed if the Dow should flatten or decline. That would maintain an upside potential target of about 13,640. Failures to maintain 13,125 level on daily closes sets up the potential for another 13,000 retest and maybe even a pullback toward 12,825 or so.

If some indices didn't receive invitations to the party today, that just left more fun for the indices that did party. Fueled by AAPL's second attempt at 600, the NDX produced a strong candle. It's in pure breakout mode on the daily chart, breaking above the widest channel on that chart.

Annotated Daily Chart of the NDX:

This strong index hasn't deigned to pull back toward its sharply rising 9-ema in more than a week, but that's not as unusual for the NDX as it is for some other indices. When an index is gaining the way this one is, it's a freight train rolling down the tracks and nothing so mundane as resistance levels, Keltner channels or the need to pull back and consolidate gains will stop it . . . until it's stopped. If I were in NDX stocks or an NDX trade, I would be pulling up my stops along the way here. A little jaunt back down to 2683-2687 would be a minor pullback in accordance with this chart and a pullback to 2650-2652 would not do major damage to anything more than short-term trades. A pullback that far, however, would mean that resistance might be thickening above the NDX, and I would then be watchful for resistance tests to fail after that. Consistent daily closes beneath 2650 or so would set up the potential for a much deeper pullback, to 2560-2566.

The RUT charged up today, finally breaking through that resistance boundary up to about 833 that had been holding it back. It was playing catch-up with the other indices and wasn't going to be held back. A glance at its daily chart questions that breakout, however, when viewed in the context of Keltner channels.

Annotated Daily Chart of the RUT:

The RUT's tall white candle pushed above the RUT's potential target and potential resistance on daily closes, embodied in the purple channel line. However, I've lightened the oval at that upside target so readers can see how the RUT closed with relationship to its potential resistance on daily closes. The breakout wasn't convincing in Keltner terms. The resistance more or less held. In these circumstances a pullback to the 9-ema, perhaps at about 823-825 by the time it could be tested, seems as likely as a continued breakout. If the RUT can build on these gains instead of pulling back first, I've drawn a rising trendline that describes the top of a rising wedge in which the RUT has been trading. Although any further breakouts and continued closes above the purple Keltner channel set up a potential target and possible resistance near 889, I would certainly be cognizant of the resistance that might be found in the 860 region. Bulls should be aware that this breakout wasn't as convincing as it might have been and the RUT has not been behaving as we expect in market rallies, when this liquid and momentum-driven index typically leads the way. Be protective of bullish gains. If the RUT does rise, plan how you'll deal with that 860 area ahead of time.

The dollar's behavior might have been influenced by many factors today, including the sigh of relief from Europe and most certainly the mouthing of the phrase "QEIII" again.

Annotated Daily Chart of the Dollar:

The daily candle was bracketed by two -ema's I use on my Keltner charts, the red 9-ema and the peach 120-ema. Next direction is difficult to ascertain from this chart, and maybe from any chart without knowing how FOMC President Bernanke will respond over the next couple of days and what might occur in Europe. A drop to 79 looks as likely as a climb to 81.

All major sectors were higher as were major indices.

Tomorrow's Economic and Earnings Releases

Tomorrow's U.S. economic calendar includes the important Building Permits and Housing Starts at 8:30 am ET. Permits are expected to climb slightly to 0.69M from the prior 0.68 M. Starts are expected to stay at 0.70M. Since the housing crisis erupted, this number has proven important, and it may be even more so after today's NAHB report.

Those releases will be bracketed by the weekly ICSC-Goldman Store Sales at 7:45 AM ET and the Redbook sales at 8:55 AM ET. The RLX, the S&P Retail Index, has been one of the indicator indices I watch, as the retailers have been leading the charge higher in this prolonged rally.

A 4-Week Bill Auction at 11:30 will round up the morning's action in the U.S., although I'm certain we'll be paying attention to those developments in Europe.

At 12:45 PM ET, Federal Reserve Chairman Ben Bernanke will speak at the George Washington University School of Business in Washington, D.C. He will deliver the first part of an address titled "The Federal Reserve and its Role in Today's Economy." I could not find notations about whether he is expected to include a Q&A session.

In what appears to be a busy week for state Federal Reserve Bank Presidents, Minneapolis President Naryana Kocherlakota will speak in St. Louis at Washington University, taking part in the Hyman P. Minsky Lecture Series there. A Q&A session will include both audience and media.

Today the long-awaited auction to settle Greek credit default swaps took place. However, the week is rife with other possible pitfalls related to Greek and other debt, including some tomorrow. An article published on the Nasdaq website offered the following events this week as belonging on a "known worry list":

Tuesday, March 20: Spanish and Greek T-bill auctions.
Wednesday, March 21: German bond auction.
Thursday, March 22: Flash euro-zone March PMI data.
Friday, March 23: New deadline for exchange offer of Greek bonds under foreign law and bonds issued by state-owned companies.

To read the list and determine further-out dates, you can check this link.

An addition needs to be added to that list. Today, it was confirmed that FOMC Chairman is to testify before the House on Wednesday. He will be speaking about the European debt crisis.

What about Tomorrow?

The SPX has been in breakout mode on the 30-minute chart, on a Keltner basis, since last Tuesday. Prices and the 9-ema itself have been skipping higher along the Keltner channel boundary shown below, like a stone skipping on a lake's surface.

Annotated 30-Minute Chart of the SPX:

Those whose trader would perform better with a pullback want first to see the SPX start finding consistent 30-minute closes beneath the red 9-ema. Doing so will flatten the smallest channel in which the SPX is traveling and bring it and the other channels into better alignment. Until that happens, it's going to be difficult to ascertain where the next upside target early in the week or downside support might be. When the moving averages and channel lines are so widely spaced, it's easy for a downturn, once it begins, to cut right through them. Using a guestimate, I would find it likely that nearby support might first be found near 1402-1404, the level to which a couple of the averages might have fallen if the SPX rolls down. Other levels are marked with ovals.

If the SPX and its 9-ema do continue skipping along the top of that channel, realize that the tenor has not yet changed. I have to look to the daily chart to determine a next potential upside target and potential resistance on the SPX's chart, as it's in breakout mode across everything through the 120-minute chart. There's special danger when the charts are set up this way. I'm not avoiding giving a prediction here but instead am giving one: the momentum train is still going strong. At some point, it will be going so fast that it can't hug the curves when one appears. Until that happens, your savings would be in danger if you placed all your valuables on the tracks in front of the oncoming train. You'd be equally in danger if everything you own is on that train when it tips over the edge. Just keep edging up your stop losses as the SPX climbs. Evaluate the risks both directions.

For another gauge of the SPX's tenor, you might watch the 120-minute 9-ema. The SPX has been finding support on 120-minute closes on that average on each test since March 7. It would take several hours to confirm consistent closes beneath this average, so it wouldn't be a first sign that the tenor had changed, but it would be a confirming one. A slight change in tenor doesn't mean deep declines. No change in tenor means just that, of course.

The Dow has stopped skipping along that same configuration and presents a picture of how the SPX might begin to look when it begins to falter.

Annotated 30-Minute Chart of the Dow:

Note that the Dow has begun to falter, and it looks as if the red oval along that moving average now at 12,219.76, but likely closer to 12,200 if the Dow were to drop toward it, might be tested. This is analogous to the 1404 level on the SPX's chart. The Dow is no longer in breakout mode according to this short-term chart, and it's possible that any attempt to bounce would find resistance on 30-minute closes near about 13,266-13,275. The chart formation is one that suggests that if the Dow should drop down to test the 13,200 level and should lose that support on consistent 30-minute closes, a test of about 13,165-13,13,172 might be the next target. If the Dow breaks higher again instead of dipping to next support, look to the levels pointed out on the daily chart as next potential targets. Like the SPX, the Dow has been finding support on 120-minute closes on the 120-minute 9-ema each time it's been tested since March 7. Unlike SPX, the Dow ended the day at that -ema, now at 13,235.68. The same cautions about using this -ema on the SPX are true for the Dow, but it can be one gauge you use.

The NDX's 30-minute chart shows what it would look like if the Dow were to break back above its potential resistance again after falling back inside the channels. Today the NDX broke out again after erasing its breakout status last Thursday and Friday.

Annotated 30-Minute Chart of the NDX:

The NDX sprang out of its channels again today after sinking back inside late last week after a similar momentum breakout. By the close, the NDX had pulled back to retest the breakout level, with the outcome of that test not decided by the close. When seen on this 30-minute chart, the chart that usually contains most price movements over several days, the NDX's action doesn't make much sense and isn't very predictable. However, the NDX has been bouncing from each test of its 120-minute 9-ema since March 7. If I were an NDX trader or had a trade otherwise dependent on the NDX's action, I would watch the 9-ema on 120-minute charts as an indicator of whether the NDX's behavior had changed at all. If it pierced that -ema and but then closed above it before the close of a 120-minute period, nothing has changed and the tenor remains the same. As of this typing, that MA was at 2,722.83, but it is of course dynamic and will change as prices change.

The RUT, too, has been performing just as other indices have with respect to a 120-minute 9-ema. That average was at 834.58 and still rising as of the close today. A strong move either direction tomorrow morning will move that -ema, too, of course. It can be used as clarification of a change in tenor or no change in tenor for the RUT, as well as for other indices, but let's look at the RUT's 30-minute chart to see if it tells us anything.

Annotated 30-Minute Chart of the Russell 2000:
[Insert chart 031912rut10]

It turns out that this doesn't tell us a whole lot. Like the NDX, the RUT ended the day testing the breakout marker with no determination if that's going to hold as support or not. A drop to 832-834 looks about as likely as a climb back to retest the day's high.

So, what do you do about tomorrow? Protect any bullish profits you might have. By all means, hedge against upside moves if your trade requires it--I did again today, and those constant efforts to hedge have kept skeptical me from incurring big losses as the indices continue to climb. I'm sounding like the boy crying wolf, but I would be just as vigilant about your downside risks, too. OTM puts are cheap right now. If your trade would be unduly hurt by a sharp rollover and if you have plenty of available profit so that you can spend a little of it to buy one of those cheap OTM puts, that might be a tactic you could employ. Such a tactic would not prevent you from incurring losses in a big downside move, but it might steady your trade long enough that you can make other adjustments. I did that, too, today, buying a cheap OTM put.

The RUT's catch-up move today did not impress me, although I obediently adjusted when my trading plan suggested I should, no matter what my own feelings were. The Dow put me on alert, especially when its behavior was echoed by its sister index, the transports. Yet there's been no change in tenor in the SPX and NDX, so I'm on alert but certainly not bailing out of trades. I am also somewhat cautious about buying into the QEIII or all-is-well-in-Europe euphoria just yet. With Fed Chairman Ben Bernanke speaking tomorrow and testifying before the House Wednesday, we will see plenty of opportunity for that QEIII talk to be reined in, if Dudley was speaking out of turn. All day, forex boards were reporting the earnest assertions of Portugal's finance minister about that country's advances in controlling its own problems, but I could draw from Shakespeare when I say that I always feel my hackles rise a little when I hear such earnest assertions that all is well in hand. These are strange times. Do your own research. Make sure you can sleep well with the trades you're employing. Have fun, but stay alert.