Market Internals


In the U.S., many traders woke to a televised FOMC Chairman Ben Bernanke speaking those apparently sweet words, sending U.S. futures higher. By day's end, new recent highs would be reached on several indices. In the reining euphoria, it would become tough to find a weak sector, but underperforming ones included real estate service. Home builders recaptured some of last week's losses but did not yet look strong on a Keltner basis. The retail index, RLX, surged, as did the tech darlings represented in the NDX.

What did FOMC Chairman Ben Bernanke say to spark the rally? Speaking before the National Association for Business Economists 2012 Policy Conference, Chairman Bernanke addressed "Recent Developments in the Labor Market." He tagged the decrease in unemployment rate as encouraging and said survey measures had "gotten brighter." However, "notwithstanding these encouraging signs," the labor market remains weak. Some signs "reflect a decline in layoffs rather than an increase in hiring." Even as his characterization of the labor market situation grew gloomier, e-minis spiked above the overnight congestion zone. "What will lead to more hiring?" he asked. "The short answer is" more robust economic growth. He pointed to a puzzling apparent failure of Okun's law to adequately account for the recent improvement in unemployment. Okun's law, named after economist Arthur Melvin Okun, relates unemployment to the GDP.

FOMC Chairman Bernanke said that Okun's law suggests that we needed to see "real GDP growth at 4 percent rate in one year to achieve a 1 percent reduction in unemployment." That renders the recent reductions in unemployment outsized in relationship to our much smaller-than-needed GDP growth. Has Okun's law failed in its predictive qualities or is something else afoot, the chairman asked? He posited several questions. Will either real GDP or unemployment be revised? Are workers giving up looking for work to an unusual extent, skewing the unemployment numbers? His analysis concluded, rather, that the outsized improvement in unemployment rate is a kind of catch up process. Employers reduced their payrolls at an unusually high rate--as indicated by the GDP--during the worst of the downturn. Now we're seeing "the flip side of that," he concluded.

The labor situation has a "glass half full tone" with the unemployment situation having been "far outside the norms since World War II." He does not believe the persistently high unemployment rate can be pegged to a mismatch of jobs to skills. He points out that long-term and recently unemployment fell in tandem, which would not be true if there were such a mismatch.

He concluded that the job market has been improving, but that conditions still remain far from normal. "Moreover we can not be sure that the recent improvement in the jobs situation will not be reversed," he said, pointing out that "such a reversal has once occurred" during this downturn. His research concludes that "cyclical rather than structural factors are likely responsible" for the high unemployment rates we've experienced, not a mismatch of jobs to skills. Such a cyclical problem requires that magic phrase that so encouraged the markets: accommodative policies.

He warned that "a cyclical problem can be converted into a structural one by policies" that are too restrictive. If it does turn out that the unemployment situation is a structural problem, fewer tools will be available, but that doesn't mean nothing can be done, he assured listeners. The dollar dropped like a stone, and equity and some commodity futures strengthened their bounce.

If the FOMC Chairman's speech broke U.S. futures higher out of a congestion zone, overnight action had already set up that congestion zone at positive levels. The days when we could concentrate only on U.S. economic releases expired long ago. Especially over the weekend, global financial giants warn, cajole or reassure market watchers, as Klaus Regling, head of the EFSF, the European Financial Stability Facility, did when he urged Eurozone leaders to allocate more money to their firewalls to calm volatility in the markets. European leaders uneasily noted last week's rise in bond yields in Spain. Germany still digs in its heels, and articles about a potential Greek exit from the Eurozone still regularly surface.

Many Asian bourses produced flatline or lower closes, perhaps still weighed by fears about China's economic and political health. European bourses, however, gapped higher, dropped down to or below the flat-line level and then immediately leaped up again. Today's allotment of global releases included Germany's Ifo Business Climate, forecast at 109.7, slightly higher than the prior 109.6, and that number came in slightly above expectations at 109.80. While I can't attribute the behavior of European bourses solely to the Ifo number, they did begin improving at about the time of this release. The Ifo Institute for Economic Research surveys manufacturers, builders, wholesalers and retailers to obtain this respected composite index.

All this euphoria could have been tempered by the report that was about to be released. At 8:30 am, the Federal Reserve Bank of Chicago released the Chicago Fed National Activity Index for February, momentarily letting some air out of the euphoria balloon that had been floating around after FOMC Chairman Bernanke's speech. Jim Brown had noted this weekend that this would be a key release. It proved to be a disappointing one for this index where zero marks the line between growth and contraction. This national index dropped to -0.09, "pulled down by production," according to the report. The three-month average rose to +0.30 from the prior +0.22, however. That led the Chicago Fed to conclude that "February is an outlier" in which the "weakest factor by far remains consumption and housing." Futures traders apparently heard "outlier" and either ignored the report or else believed that it strengthened the case for more accommodation. That set the stage for the pending home sales that was to appear shortly.

Monday's Developments

When the cash market opened, indices roared higher.

Despite the importance of the pre-market developments and early trading behavior, many traders certainly focused on the National Association of Realtors' Pending Home Sales, released at 10:00 am ET. The Association considers this a leading indicator of future sales. The prior number showed a 2.00 percent increase, but expectations for this month were tempered to a 1.0-percent gain. Instead, the number dropped -0.5 percent. Just as has happened with other numbers recently, the headline made an effort to report this in a rosy tone, saying that the number remained "solidly higher than a year ago." The NAR's chief economist, Lawrence Yun, characterized the upcoming spring buying season as "bright." Pending sales fell in the Northeast, South and West, but climbed in 6.5 percent in the Midwest.

The Dallas Fed released its general business activity index at 10:30 am ET. Although the consensus range for March had been 15.0 to 18.5, the reported number was only 10.8. February's had been 17.8, the highest number since November 2010. This questions again whether February's numbers were an outlier, but going in a different direction than those reporting the Chicago Fed's national index concluded.

Bill auctions for Monday included the 4-Weeks at 11:00 am ET and the 3- and 6-Month at 11:30. About that time, something happened that spooked the markets, with the yields on longer-dated treasuries, such as the five-year, ten-year and thirty-year, suddenly dropping. I couldn't find any reason that explained the sudden drop, but this somewhat unraveled the impression that traders were going to roll out of treasuries and into stocks. Equities pulled back in concordance with this drop in yield, but only temporarily.

Others strange things were happening. Those watching the crude futures were noting backwardization in brent crude futures, which means that traders thought the current spot price is higher than it will be several months out. Look to Jim Brown's commentary in the Wraps and in Oil Slick for explanations about what could be happening in crude.

Story stocks today included homebuilders, declining today. They also included YHOO, "guaranteeing a proxy fight," as one commentator phrased it, by appointing three new independent directors. ARNA announced that its filing of a Marketing Authorization Application for lorcaserin had been accepted by the European Medicines Agency. The company is testing lorcaserin for weight loss and maintenance of weight loss.

AUDC lowered guidance for the first quarter and 2012. The future of the BATS IPO and maybe the BATS exchange was discussed today. Jim covered the BATS IPO debacle in this weekend's newsletter, and today a MarketWatch article mentioned an uptick in calls for the exchange to "suspend key parts of its business."

After the close, APOL reported. After a 43.20 close, the stock was trading 45.06 as this was typed. Earnings were deemed "surprisingly strong." by Avi Salzman, writing for Barron's. Earnings per share were 58 cents, 20 cents above expectations. Revenue came in much stronger, too, at $969.6 million versus the expected $933.3 million. However, overall enrollment fell, and the after-hours bounce was from a base it had been forming after falling precipitously since the beginning of the year.


Last week's chart suggested that it was time for the SPX to either pull back to its daily 9-ema or else flatten while the 9-ema rose up underneath the price. The SPX pulled back. A repeat of its normal rally pattern would then produce a tall white candle that bounces sharply from that potential support. In accordance with its pattern, the SPX obediently jumped higher.

Annotated Daily Chart of the SPX:

If the SPX is to follow its typical rally pattern, today's tall white candle will be followed by either a sideways to sideways-up movement of smaller-bodied candles for 3-8 days, followed by another test of the rising 9-ema's support. As was mentioned last week, a potential upside target remains in effect as long as the SPX produces daily closes below that 9-ema. It would take consistent daily closes below that rising average and not just a one- or two-day test of the smallest Keltner channel's lower boundary to change that pattern. The potential upside target is now just above 1440, but that dynamic channel boundary changes in the direction of any strong movement.

The SPX won't rally forever, and that pattern will break at some point. I would be wary if we get a steep pullback the day after a strong gain like today's, for example.

At the risk of creating a chart too busy to read, I have also drawn the near-term rising price channel in which the SPX has been traveling. Unless we're to see a parabolic move in the SPX akin to what I'm seeing in indices such as the RLX, I would be watchful for pullback potential within that channel to begin soon. The SPX did not pull back within the channel but rather rode along the underside of the top resistance line back in February and early March, and that's always a possibility, too. However, those who may have entered long positions as support was tested would do well to protect profits as the SPX moves higher. A pullback to potential support on daily closes near 1383 or to the bottom of that price channel would not be surprising, although anything deeper than 1378 would violate the last swing high. On a Keltner basis, consistent daily closes beneath about 1383 sets up a potential downside target near 1359 or a bit lower by the time it would be tested.

Last Monday's Dow candle indicated indecision, and the Dow looked weaker on a Keltner basis than the SPX. It closed below its daily 9-ema on Thursday and found resistance there on a daily close on Friday. Today it broke above it again.

Annotated Daily Chart of the Dow:

Although the Dow broke back above that daily 9-ema and charged higher, it could not produce a new recent daily high above the March 16 high. Comparing the charts with Keltner channels allows us to assess that the Dow was weaker on this basis than the SPX.

Resistance, then, lies in a band from today's high to the March 16 high of 13,289.08. (Note: I was still stuck in the 12,000's last week on some of my commentary. I apologize if it created any confusion.) The Dow needs to clear that resistance on consistent daily closes before it sets a new upside target on this chart, marked by the upper green oval, just above 13,600.

If I were looking at only this chart, without having the context of the other indices, I would say that today's performance sets up the possibility that the Dow will return to 13,000-13,004 to retest support. I am not looking at this chart in a vacuum, however, so either the Dow's and Transports' relative weaknesses are going to eventually tug the other indices back into their Keltner channels or those stronger indices are going to pull the weaker ones on a Keltner basis up and set up new higher potential targets.

AAPL had led the NDX to a stronger finish last week than some other indices, but later in the week the NDX slipped slightly, letting the 9-ema rise up underneath it. It got traction again today, reaching levels not seen since late 2000. It still looks stronger than the SPX and Dow on a Keltner basis.

Annotated Daily Chart of the NDX:

I have to look at the NDX's weekly chart to find a potential upside target for this index. That target is near 2822. The NDX does trade remarkably well in accordance with the strongest Keltner support and strongest Keltner resistance on the weekly interval chart that I studied, but it doesn't always touch each level exactly. Even if that resistance was going to prove important, that also does not mean that the NDX might not pierce it for a few days before falling back or just keep butting up against it, nudging it higher. What the chart that I studied suggests is what I've been suggesting all along: we haven't seen any weakness, but bulls should continue to ratchet their stops higher and be prepared for the kind of pullback that is nothing more than a regular sort of testing of prior support. Because the NDX is so strong, it's far outstripped that support on a weekly basis, with the weekly 9-ema way back down at 2,641. Bulls need to be prepared for that possibility, as there's nothing on the weekly chart to preclude such a decline. Let's turn back to the daily chart to determine if there might be closer support.

That first line of defense on daily closes is always the 9-ema, now at about 2726-2727 but likely to have moved slightly before it could be tested. Until that is broken on consistent daily closes, the NDX's tenor has not even begun to change. The next line of defense on daily closes is the support near 2692, and any change already happening hasn't been significant until and unless this support is broken on consistent daily closes. A strong downdraft tomorrow morning or any other morning would likely push that potential support lower, perhaps to the early March swing high of 2650. That's certainly getting close to the weekly potential support, too, and normal pullback zone on the weekly chart.

I wouldn't want to be stepping in front of this train as long as it's maintaining its short-term rally pattern of consistent daily closes above the daily 9-ema. Unless any downturn, should one occur, is sharp and scary, I wouldn't see anything that would stop bulls from stepping back into NDX trades at one of those support levels, either, so bears need to watch carefully for potential bounces at one of these support levels if a downturn did get started.

The RUT's supposed breakout last Monday did break prices to new recent closing highs, but the breakout didn't look convincing on a Keltner basis. That breakout wasn't sustained as I suspected it wouldn't be. Like many other indices, the RUT fell back and tested its 9-ema. Today it charged right up to the same Keltner setup that had stopped it last Monday. Sorry, bulls, but the breakout still isn't convincing on a Keltner basis.

Annotated Daily Chart of the RUT:

The breakout might not have been convincing enough on a Keltner basis to set up a new upside target, but the RUT did manage a new recent closing high, punching above the high produced last week. Evidence is mixed, then. A gap one direction or the other could resolve the conundrum. If the RUT leaps above that Keltner resistance and finds support above it all day, it sets a potential upside target near 890. As I noted last week, however, any in bullish trades should be aware of the potential resistance to be found at the top of a wedge shape in which the RUT has been rising. That top line has risen to about 867, and I would ratchet up my stops as that was approached. Make advance plans for how you'll treat that level if it is tested.

If the RUT were to gap lower tomorrow and head down, potential support exists at the 830-833 level, composed of the daily 9-ema, gap support, and the congestion zone in which the RUT rattled around for a few weeks. It will likely take a strong downdraft to break through that level now, but the geopolitical and U.S. economic climates are such that the right precipitant can easily be delivered. If that potential support zone is violated, watch for support near 814-816. A deeper level is also marked on the chart.

Renewed "accommodation" talk submarined the dollar through support that had been mostly holding up on a daily closes over the last weeks. It dipped toward but not all the way through potentially strong support near 78.79-79.24. For today, that support held. It is composed of Keltner support such as the 120-ema, historical support and a long-term rising supporting trendline.

Although I usually show the dollar's chart in this space, I'd like to show one of the other indicator indices, along with the $DJT and the BIX, that I use to watch what's going on underneath the markets. This is the RLX, the retail index. It's been on a high-momentum run, bouncing handily off its daily 9-ema all this year, without so much as a single pullback all the way to the bottom of its rapidly rising smallest Keltner channel. The $DJT, the Dow Jones transportation index, has long been offering a warning since it was not making new recent highs along with its sister index, the Dow. The BIX (and also BKX) and RLX told a completely different story, muddying the crystal ball's picture. They have continued charging higher with few pullbacks. I suggest you put these indices on your radar. If we're going to see any meaningful pullbacks, we'll likely see some of the air leak out of these indices rather quickly. If equities appear to be rolling over but the BIX and RLX remain strong, keep some skepticism about the pullback. They might not roll over at the same time as other indices, so I wouldn't use this as a market-timing tool, however.

In the slang of chart watchers, this underlying has gone parabolic. I start getting scared of an underlying when that happens. As AAPL has taught us, gains can just keep coming, but we've seen other market conditions when a chart like this was a prelude to a sharp rollover. If you're in retail stocks, snug up those stops! But for all of us, this index and the others I mentioned could serve to give us warnings we will want to heed. They haven't yet issued any of those warnings, however.

Annotated Daily Chart of the RLX:

Tomorrow's Economic and Earnings Releases

Tomorrow's G7 Meetings will certainly offer headline opportunities and might roil our markets. Ireland's prime minister said Monday that "his government will announce Tuesday a date for Ireland's referendum on the European Union fiscal treaty," according to an AP article titled "Irish plan to announce EU referendum date Tuesday."

Domestic economic releases include the regular weekly ICSC-Goldman Store Sales at 7:45 am ET and Redbook sales at 8:55 am ET. The monthly S&P/CS Composite-20 HPI year-over-year change in the selling price of single-family homes in 20 metropolitan areas follows those releases. As was today's Pending Home Sales, market watchers consider this a leading indicator. The prior number dropped 4.0 percent, and forecasters predict another drop this time, of about 3.8 percent. This number will be released at 9:00 am ET, followed an hour later by the potentially more important Conference Board Consumer Confidence. The prior number was 70.8, a big jump from the previous month's 61.1. Forecasts anticipate a drop to 70.3.

The Federal Reserve Bank of Richmond releases its March Manufacturing Index during the same 10:00 am ET time slot. With 0 representing the demarcation between improving and worsening conditions, the prior month's number was 20. Current forecasts for that number predicted a drop to 18. That time slot will also include the State Street Investor Confidence Index.

FOMC Chairman Ben Bernanke speaks again tomorrow, this time at the George Washington University School of Business. He'll be speaking at 12:45 pm ET.

Treasury auctions include the 4-Week Bill auction at 11:30 am ET and a 2-Year Note auction at 1:00 ET.

Important earnings tomorrow include LEN and WAG's. After last week's disappointment from KBH and some housing numbers that haven't been all that market watchers would like, market participants will be closely watching LEN's report. Some experts believed that KBH's disappointment was a KBH-specific problem, but that impression may be rethought if LEN also disappoints.

What about Tomorrow?

This morning, the SPX ran straight up and hit its head against potentially strong resistance on 30-minute closes, the outer Keltner channel line seen on the chart below.

Annotated 30-Minute Chart of the SPX:

The SPX was in breakout mode on this 30-minute chart and, indeed, all the way up through the 120-minute chart. In the normal course of events, a large-range day to the upside would produce either a small-range day to consolidate gains or a reversal, but we will somewhat be at the mercy of the G7 meeting sound bites and our own economic numbers and earnings reports. All we can do is look at what would happen in the normal course of events and build an if/then kind of scenario that will tell us when things are going off the tracks. Normally, on a chart set up like this, we have just wait out this momentum run, which can go on longer than the chart setup predicts that it will. We would then expect to see a pullback to the 30-minute 9-ema, the red line here, wherever it might be at the time. If the SPX is still in upside runaway mode, it might pierce that 9-ema during the course of a 30-minute period but wouldn't close more than one or two 30-minute periods below it, and then, not far below it. So, bulls want to see that happen. If the SPX gaps lower or drops further, they would want to see the potential support now near 1409-1412 hold as support on 30-minute closes. If that does happen, bulls would then need to be wary once 1414-1417 is tested again because it might be resistance the next time it's tested.

If that 1409-1412 support doesn’t hold if tested, then the SPX might tumble down to 1407-1404, where next support lies, and bulls should suspect that the next highest resistance might hold if tested. If the support doesn't hold, look for support from about 1387-1401. I'm estimating where the Keltner channel lines might be by the time they're tested, but a strong move either direction would move those Keltner channels in the direction of the price movement.

The Dow looked weaker than the SPX on a Keltner basis and also when comparing how it fared with respect to last week's high. The Dow challenged neither.

Annotated 30-Minute Chart of the Dow:

It's set a potential upside target that would retest the high 13,269.48 high from last week. However, it could pull back to test its rising 9-ema at any time now. On the Dow chart, consistent 30-minute closes beneath that 9-ema, now at 13,219, would lessen the probability of that upside target being reached before a test of 13,200, and much, of course, would depend on such a downside test. If the Dow should drop much below 13,180-13,200, bulls should watch for potential resistance at those levels if retested. A test of 13,130-13,150 can't be ruled out, but I would expect that before any such test, the Dow would at least attempt to bounce from 13,180-13,200 and then roll over again if it can't punch through that resistance. To conclude, a retest of last week's high or of the 30-minute 9-ema now near 13,219 appear about equally likely, and it would be outcome of those tests, if they occur, that would hint at the next developments.

As has been true lately, the NDX was one of the indices leading the charge higher. It not only challenged the same resistance that the SPX did this morning, but it also broke through it this afternoon.

Annotated 30-Minute Chart of the NDX:

The NDX of course is also in breakout mode on this chart and other intraday interval charts, too, with no nearside target we can pinpoint. We have to just let the momentum run out and then watch how tests of the 30-minute 9-ema proceed to build the next scenario for short-term action. That momentum can run out in one fell swoop, in a whoosh, in a gap lower. It can continue for days with prices finally chopping sideways until the Keltner channels realign themselves. As this is written, it's impossible to predict which will happen.

If the NDX continues higher, watch tests of the rising 9-ema on this chart to determine whether the upward momentum remains strong or whether the NDX instead begins a pullback by forming consistent 30-minute closes beneath a turning-lower 9-ema. Potential support thickens from about 2760-2772, but a gap below about 2760 or consistent 30-minute closes beneath that level would suggest that they had been converted to resistance, and a new target near 2750-2753 would be set up. Consistent 30-minute closes beneath that would set up a potential downside target near 2725-2730.

On a Keltner basis, the RUT broke out sooner and stronger than the NDX, breaking through the same Keltner setup during the first hour of trading. It broke above last Monday's high at the same time.

Annotated 30-Minute Chart of the Russell 2000:

After breaking higher, the RUT pulled back to retest the Keltner resistance it had broken through earlier in the day and then rebounded. When I've suggested that traders watch how tests of these Keltner levels proceed, this is what I mean. When the RUT tested its breakout levels, it formed consistent 30-minute closes above them and charged higher again. Bulls want that kind of action to continue. Watch that rising red 9-ema as a first guide to how strong bulls remain. Support might be found anywhere from about 840-845 on pullbacks, as potential support levels thicken throughout this zone and are joined by the historical support of last week's swing high at 843.25. A failure for any these potential support levels to hold would suggest a new downside target near 830-835 or even 825-829 if that doesn't hold on consistent 30-minute closes.

Let's sum up. In normal rally mode, as we've been in, today's strong gains would be followed by small-bodied candles as indices consolidate gains. They would produce these types of candles over a number of days, trading sideways to sideways up until the daily 9-ema has risen beneath them. Then they would dip, perhaps quite suddenly, test that moving average, and if the rally strengthens again, bounce from it. Nothing has happened that will yet argue against this possibility, so bears should be aware that it can happen again, just as charts warned last week. This would be supported by the idea that window dressing will continue into this week.

However, remember that settlement for equities is three days after the transaction, and, toward the end of the week, fund managers can start dumping all those equities they bought to accomplish that window dressing, especially if they're fearful of risk. Even in normally happy market conditions, markets don't go up forever, and we've had an outsized number of higher closes on weekly candles than is the norm. Any time now, it's going to be time for a steeper pullback than the one we had a couple of weeks ago, just in the normal course of things. For example, if I look at a weekly chart of the SPX, a pullback to the February high of 1,370.58 is nothing on that chart, a blip. Would it be nothing to your options trades if that should happen in a two- or three-day period? Keep ratcheting up your stops. Don't stand in front of a train roaring down the tracks, but don't go home any night with too much risk to your portfolio if stocks should tumble overnight, either.