Market Internals


April showers appeared in scattered countries' market performances across the globe, but weather in our markets proved mostly sunny here in the U.S.

Last night, Japan's important Tankan Index disappointed, coming in for the second month in a row at -4. It had been expected to rise to 0 according to some sources. The non-manufacturing version met expectations of 5, however. These numbers measure sentiment among manufacturers and service providers. Market watchers blamed fears of the yen rising against the dollar for the weaker-than-expected manufacturing number, but some causation must be apportioned to manufacturers such as Sony, Panasonic and Sharp Corp. Sharp and Panasonic predict record losses, according to a Bloomberg report, while Sony predicts losses more than twice the previous annual loss forecast. GDP may still expand, boosted by reconstruction spending.

Also last night, HSBC released results of a private survey of smaller factories in China, with that survey questioning the true strength of the Chinese economy, says Jean Chua, a writer for CNBC. The larger March PMI had jumped to 53.1, but this smaller survey dropped to 48.3, into contraction territory. An economist with Nomura also warned that the March 53.1 number wasn't the good news that some took it to be last week. The economist, Zhiwei Zhang, advises that March's PMI almost always climbs about three points above the February number and that it actually came in below its official March average of 56. CNBC writers weren't alone in their interpretation of China's reports. In a Bloomberg article appearing overnight, writer Elizabeth Campbell reported that commodity investors were drawing back on bullish commodity trades after Goldman Sachs Group Inc. had lowered its recommendation on raw materials last week due to signs pointing to slower growth in China. We didn't see too much evidence of that drawing back today, however, with the USCI, the United States Commodity Index, rising 1.09 percent.

Others experts would have and did dispute the conclusions of that entire previous paragraph. That smaller HSBC survey is more sensitive to exports, they point out. Western analysts who worry about a hard landing in China are misinterpreting the data, they would (and did) say.

What was the end result? The Nikkei started off strong but drifted lower all night, closing up only 0.26 percent. The Hang Seng started off in positive territory but soon dropped into negative territory, closing down 0.16 percent. The Straits Times closed up 0.19 percent. In Europe, bourses climbed at the open but soon dropped, pressured by economic releases that began appearing in Europe. Our sunny skies were to lift their spirits, with gains accelerating after our markets opened and into the European close. The FTSE 100 gained 2.31 percent; the DAX 1.58 percent and the CAC 40, 1.14 percent. One article attributed the rise of an easing of China worries, but the pattern belied that reasoning. European stocks were headed down until our bourses opened and started gaining.

Beginning about 4:00 am ET, European countries had released a host of unemployment and PMI numbers that had contributed to the early declines, concluding with the Eurozone unemployment rate at 5:00 am ET. Eurostat had pegged the last unemployment rate at 10.7 percent, with the latest number edging up to the expected 10.8 percent. PMI came in as expected, too, but that expected number was 47.7, still in contraction territory. News articles pegged the situation as "worsening," even though the number met expectations, and that was when European bourses turned lower for a time. Italian unemployment was higher than expected.

Add into the pre-market stew of events a conference call for Global Payments Inc., reporting on the unauthorized system access. This weekend's newsletter detailed the debacle that resulted Friday when Krebs on Security broke the story that Global's credit card processing systems had been compromised, involving as many as 10 million cards. Today, the company said it believes that cardholder names, addresses and social security numbers were not obtained. Track 1 card data was not taken, the company believes. The before-the-open conference call revealed that Visa (V) no longer includes the company in its list of compliant service providers. GPN reports significant progress in defining and resolving the event. Investors still weren't pleased. They dropped the stock an additional 3.71 percent below its price when halted on Friday.

Monday's Developments

Market participants in the U.S. hardly knew which way to head at the beginning of the day. Were clouds going to sweep over from Asia or were sunny skies going to prevail? The confusion was apparent as indices first headed down to wait on important economic releases here in the U.S.

Thirty minutes after the U.S. cash open, the Institute for Supply Management and Census Bureau released the ISM PMI and Manufacturing Price and Construction Spending, respectively. The prior Manufacturing PMI measured 52.4, above the 50 benchmark that measures the difference between expansion and contraction. Prices had measured 61.5. Expectations had been for a climb to 53.3 on the ISM and 63.3 for the Prices. This weekend's newsletter noted that declining numbers in the Chicago region last week questioned the strength of the economy, especially when the Chicago results can be a predictor of the national ISM. The headline number unexpectedly increased to 53.4, and the markets took immediate cheer from the sunshine spreading across the markets. The prices component numbered only 61.0.

The Institute noted that the manufacturing sector produced its 32nd consecutive month of gains, with the overall economy producing 34 consecutive months with this March report. Only two industries out of 18 reported contractions, with those being computer and electronic products, and chemical products. Scanning the included sample comments from manufacturers revealed a range of comments, ranging from "some concerns regarding continued slowdown in China" from a manufacturer of computer and electronics products to "business is robust" from a manufacturer of chemical products. The table below provides a snapshot of the report's components. With Conn's (CONN) earnings tomorrow, we might get a peek at how one electronics and services store's business has been doing.

From the Institute for Supply Management:

The prior Construction spending had disappointed, falling 0.1 percent. Forecasters predicted a rebound of 0.7 percent, but construction spending instead fell 1.1 percent despite favorable weather conditions for the construction industry. This was the largest decline in seven months. Builders may worry about adding new projects when foreclosed properties may still flood markets, Timothy R. Homan concluded in a Bloomberg article. In addition, governments from local to federal have cut back on spending. In particular, a decline in power plants appears to have impacted the number.

Market participants appeared to focus more on the upside surprise in the ISM than on the downside one in construction spending. As soon as the numbers rolled out, indices climbed off their early lows and took off to challenge resistance levels up ahead.

Treasury auctions rounded out the day's economic calendar. Those included 4-week, 3-month and 6-month auctions, all at 11:30 am ET. Yields at first climbed today but then dropped off their highs, with bond market investors still keeping the accommodation talk on their radar. Yields on the five-year, ten-year and thirty-year all edged down.

Story stocks for the day of course included GPN, but owners of Avon Products (AVP) got happier news first thing this morning when Coty announced that it had submitted an offering of $23.25 a share. Coty believes it can pull together the equity financing and asserts that Avon's shareholders would like the benefits of the deal. Apparently, not all agreed, with Avon rejecting the unsolicited offer by late morning. They certainly must have liked the pop in the stock's price today, however. AVP ended at $22.70, up 3.34 points or 17.25 percent. That was about in the middle of the day's $21.81-23.38 range.

On the unhappy side of the ledger, Groupon (GRPN) revealed the revision of its Q4 financial results that had been promised Friday. This weekend, Jim Brown reported on their revision announcement late Friday. Affirmed guidance for Q1 2012 was reduced to revenues of $510-550 million from the prior $534.1 million. GRPN garnered downgrades, too, with GRPN's business model being questioned, as Jim Brown also questioned it this weekend. GRPN closed at $15.27, down 3.10 points or 16.89 percent. It closed just two cents off the day's low.

Apple (AAPL) was in the news with a new $1,001 price target, and it did its best to make progress toward that target today, closing at $618.63, up 19.08 points or 3.18 percent. It's closing in on that recent high of $621.45. The company continues to make gains in market share, including in emerging markets, analysts report. The company also garnered accolades as the Grand Award winner of The Business Journal's American Brand Excellence Awards. One analyst said that a few years from now, we'll laugh at people who shuddered at AAPL's current market cap. Sorry, guys, but I think I'm one of those who is shuddering at the new price target, at least, if not the market cap specifically. The more exuberant the numbers and the language, the more cautious I start growing. Echoes of 1999-2000 always sound in my ears when I hear stuff like that.

Let's look at charts.


The SPX hit another new recent intraday high today.

Last week included another SPX dip to its daily 9-ema, where it again found support on daily closes. Today was time for another tall white candle if the index was going to continue its usual rally pattern of testing that average, bounding up from the test then going sideways for a few days before repeating the whole process. The SPX once again obeyed the bullish edict and charged higher.

Annotated Daily Chart of the SPX:

The SPX rebounded and produced a new recent closing high. However, the news wasn't all good. Its daily candle produced a small upper candle wick that showed that there was some selling at the end of the day. The SPX has maintained its upside Keltner target that has been in place since it first broke outside the channel now near 1,407. That upside target has been nudged higher by the relentless upward climb and is now near 1,442. On a Keltner basis, that remains a viable-looking upside target as long as the SPX maintains consistent daily closes above the 9-ema, now at just under 1,407. Bulls, then, want to see the SPX maintain daily closes at or above about 1,407. However, a nearer potentially strong resistance level looms, at the site of a long-term rising trendline, now located at about 1,432-1,434, with lighter potential resistance now at 1,426-1,427.

It is always possible, particularly with the FOMC Minutes due tomorrow and other important economic events here and abroad, for the SPX to go parabolic and head straight up to that higher Keltner target, but I would decide tonight, ahead of time, how I would treat bullish profits if the SPX closely approached 1,425 and especially if it headed higher than that. The weekly chart reveals a long, long string of white candles with higher closes, interrupted only briefly with small-bodied red candles sprinkled here and there. In candlestick fashion, those higher closes are known as "record" candles, and it's usually not typical to have more than 5-8 without a real pullback. A one-candle interruption such as those we've had doesn't count. The weekly chart reveals that we're way overdue for a pullback, then, although charging-higher indices can of course continue to charge higher.

If bulls need to know what they'll do to protect profits, bears also have some deciding to do this week. They need to decide ahead of time how they would deal with bearish profits if 1,407 were closely approached this week, since that's a potential bounce zone.

"Potential" doesn't mean guaranteed, of course, and I don't have a crystal ball. I don't know if the Minutes are going to echo those sweet nothings whispered last week or if they're going to disappoint with other language. If the Minutes or news bites out of Europe disappoint and support at 1,407 is eventually lost on daily closes, watch for a potential drop toward 1,383-1,385, where next support on daily closes might lie. Below that, Keltner levels suggest 1,367-1,369 could be tested. Bulls don't want to see those levels give way on daily closes.

When the SPX and Dow are looked at together, the Dow's underperformance questions the SPX's rally pattern's strength a bit, too. The Dow has not broken out above the channel line that would set the next higher upside target. Instead, it's been finding resistance on daily closes at that channel line.

The Dow's bounces prove less exuberant, and it appears to be coiling more than bouncing. If the Dow is viewed in comparison with its sister index, the transports, we see that the transports are also much weaker on a Keltner basis, further questioning the Dow's behavior.

Annotated Daily Chart of the Dow:

On any upside breakout tomorrow morning, watch for potential resistance at about 13,333-13,340. Not unless the Dow can maintain consistent daily closes above the channel line now at about 13,263-13,265 does it set the next upside target, at about 13,645-13,655, and I would be leery if it didn't close above 13,333-13,340 that any attempted breakout had just overrun resistance a bit. We can't use the 9-ema as a barometer for the Dow because the Dow has weakened and begun chopping back and forth across that moving average.

The Dow might look weaker by comparison, but it's also a smaller index that's more easily manipulated. We can't count out the possibility of a climb. Williams in Master the Markets warns that a favored tactic of big money that has bought at a lower price and wants us retail traders to keep buying is to gap prices above resistance one fine morning. That forces reluctant bulls to buy and scared shorts to buy to cover, fueling the rally for them without big money having to spend too much. That's always a possibility.

If the Dow instead heads down and breaks below the 9-ema, now at about 13,179, watch for potentially strong support on daily closes at the level of the first red oval, near 12,950-13,020. That's a broad band, but any downdraft will narrow that band, and will probably narrow it in the direction of the lower number. Long-term bulls want that support to hold on daily closes, as a failure of that support suggests that the next target lies in the 12,540-12,635 region. We can all see historical support, too, at the early March low of 12,734.86. I of course would be watching that if I were in a profitable bearish trade and that level were tested, especially if that should happen over a couple of days. If such a drop happened over the course of two or three days, the Keltner support now a bit lower would probably have cycled higher to join that historical support.

Like the SPX, the NDX continues to rebound strongly from its 9-ema. No wonder, perhaps, with AAPL following the same pattern and a component of both indices. The NDX maintains breakout status on the daily chart, having overrun the outer boundaries of the widest Keltner channel, an action akin to overrunning the boundaries of a more familiar Bollinger band. It continues to show that it's on a momentum run, but reversals from such momentum runs can be cruel and sudden, so keep ratcheting up stops for bullish NDX-related trades as the index climbs. Chartists might notice that the NDX failed today to produce a new recent closing high.

Annotated Daily Chart of the NDX:

When an index is in breakout status like this, it's hard to determine a next upside target, as has been mentioned in the previous few Monday Wraps. You just have to let it run its course. The first sign that it has done so, at least temporarily, will be signaled by consistent daily closes beneath the 9-ema, now at 2,756.47, but likely a bit higher or lower tomorrow, depending on the early direction of the index. A failure of this support sets up a potential downside target at the channel lines now at 2,716, although those are dynamic also and likely to move in the direction of early trading tomorrow. It's the loss of this support on consistent daily closes that would meet the secondary condition to establish that the momentum run is over, and that the NDX might abide by more sedate Keltner standards that would allow us a better idea of likely next targets. A failure of support near 2,716 on consistent daily closes sets up a potential downside target now near 2,635. If a decline to that level occurred over a several day time period, it would have time to rise up to meet the 2,640-2,650 historical support level. Bulls want to see that level hold on consistent daily closes if they are to believe this just a run-of-the-mill pullback.

Like the Transports, the RUT just isn't behaving the way you'd expect it to behave in a strong rally. Usually it leads the way higher, and it's languishing at a lower Keltner level than is the SPX. For comparison, the SPX spent the entire day today at a level that is higher than the RUT's analogous 849-850-ish level, a level the RUT never approached today. In addition, the RUT did not hit a new recent closing high today. It gained, but when viewed in the context of the Keltner channels, the gain was not as meaningful.

Annotated Daily Chart of the RUT:

Because the RUT churns across its 9-ema, it doesn't set an upside target when it closes above that moving average or a downside one when it closes below it. A move up to 850-852 looks as likely as a drop to 815-818, and vice versa. If the RUT were to break above the upside target on daily closes, it sets a potential upside target near 890-892, but I would certainly be wary of pullback potential if it approached the top of the long-term black trendline drawn on the chart. That's currently at about 870. If the RUT were to lose support near 815-88 on daily closes, it sets a potential downside target near 780-783, although if that drop were to occur gradually over a several day period, the Keltner support would probably have risen to the early March low of 785.41, to join forces in providing potential support on daily closes. For now, when this chart is viewed in isolation, the crystal ball gives no preference over the next move, as to whether it's to test nearest support or nearest resistance. When viewed in the context of the RUT's typical lead-the-rally behavior, however, the possibility of a dip must be factored in. Because of the presence of a lot of financials in the RUT, watching the strong-runner financial-related indices such as the BIX and BKX might provide some insight. Both of those are coiling, too, and both currently look stronger than the RUT.

Last week, I mentioned the strength of the RLX, the S&P Retail Index. It, along with the BIX, has been playing the leading index part that the RUT, SOX and Transports often played in the past. The RLX was still doing so until today when it failed to produce a strong white candle as did many of the gaining indices. It did gain, but there was nothing impressive about that gain. The RLX still bears watching for an early sign of weakness, as an indicator index in the way these Monday Wraps have mentioned for several weeks. One source noted that the consumer discretionary group underperformed today, pointing out the Retail HOLDRS Trust (RTH) and SPDR S&P Retail ETF (XRT) as indices also in that sector. These are optionable, while the RLX is not, and I watch it as an indicator index only, not as a trading vehicle. On a Keltner basis, the XRT looks weaker than the other two. The canary in the mine or just a factor of its specific composition? I don't know since I don't follow that index. It goes without saying that AAPL should be on the radar screen for most traders, too, whether or not they trade the stock. I don't trade it, but it's certainly on my radar screen, the way I used to have CSCO there.

Annotated Daily Chart of the RLX:

Tomorrow's Economic and Earnings Releases

The Eurozone holds important economic events over the next few days, leading into Wednesday's ECB announcement of its minimum bid rate. These events could impact markets across the globe. Tomorrow features a final GDP for the Eurozone, but that might be overshadowed by G7 Meetings.

Don't worry: the U.S.'s slate of releases can return the favor and churn European markets, too. Vehicle sales will be reported throughout the day tomorrow. Those and Factory Orders at 10:00 am ET would ordinarily garner a great deal of attention here in the U.S., but the globe's currency and bond traders and most U.S. equity market watchers, at least, will be awaiting the FOMC Meeting Minutes at 2:00 pm ET. Those minutes will be scoured for hints about future accommodative measures.

Market watchers forecast a gain of 1.4 percent for factory orders. This number revises the Durable Goods Orders released last week, including new data about non-durable goods.

In addition to those potentially impactful economic events, we will see the normal weekly ICSC-Goldman Store Sales at 7:45 am ET and Redbook weekly chain store sales at 8:55 am ET. The 4-week and 52-week bill auctions at 11:30 round out the morning schedule.

What about Tomorrow?

I typically show the 30-minute charts in this section, but the movements of many indices have shown more near-term adherence to the Keltner support and resistance seen on the 15-minute and 60-minute charts than the 30-minute ones this last week. For that reason, the 15-minute charts will be shown in tonight's Wrap. The SPX charged up to hit an upper Keltner target today, at a channel boundary where prices usually don't linger more than a trading day before a pullback. This afternoon, they pulled back by the end of the day.

Annotated 15-Minute Chart of the SPX:

To all English majors everywhere, I apologize for the run-on sentence in the chart's annotations.

After hitting that upper boundary and trading along it for a day or less, the SPX sometimes pulls back and then charges toward it again. Bears must be prepared for a push up to and maybe above 1,423 tomorrow morning, perhaps lingering there into the release of the FOMC minutes. That's one possible scenario for the morning. With the SPX pulling back sharply to nearby support near 1,418-1,420 by the end of the day today, it's equally important that bulls prepare for a possible pullback to 1,413-1,415 tomorrow morning, where first support on 15-minute closes might lie. If that support is tested and then prices bounce, 1,419-1,422 might then be relatively strong resistance on 15-minute closes. If instead of a bounce, that support is lost, the next nearby potential target would lie at 1,408-1,411 by the time it could be tested. If the SPX dropped that low and bounced, watch for resistance near 1,413-1,415 on the bounce. A failure of that support near 1,408-1,411 sets up a potential target near 1,397 currently but likely to be 5 points or so on either side of that number by the time it could be tested tomorrow.

Like the SPX, the Dow hit an upper boundary level where it usually stays for no more than a day at most before pulling back. It pulled back this afternoon. Like the SPX, the Dow sometimes then retests that upper boundary. However, the Dow overran the support that usually bounces it, that analogous to the SPX's 1,418-1,422 level on the chart above. The Dow may be setting a tentative near-term target down at 13,230-13,240.

Annotated 15-Minute Chart of the Dow:

If the Dow were to gap up above about 13,275 tomorrow morning, that lower near-term target does not seem as likely for a first move. Instead, the retesting of the upper chart boundary now near 13,310-13,320 seems possible. However, viewed in isolation and without any knowledge of how overnight developments might push U.S. futures, a drop to that 13,230-13,240 levels seems the likeliest next move based on what appears here. Bulls want to see that 13,230-13,240 level hold as support on 15-minute closes. They want the Dow to bounce from that level after any test of that support. However, if this is how the trading unfolds, the 13,275 level should then be viewed as potential resistance on 15-minute closes.

If that peach-colored line should be tested and not hold as support on consistent 15-minute closes, a drop toward 13,200 or slightly below would be set up as the next potential downside target. A drop to and bounce from that zone would then set up 13,230-13,240 as potential resistance on a retest. A drop through that 13,200 level instead of a bounce would set up 13,077 as a potential downside target, although that potential target would likely have moved several points either side of 13,077 by the time it could be tested.

The NDX proved weaker than the SPX when compared on a Keltner chart.

Annotated 15-Minute Chart of the NDX:

Now that you've viewed several of these intraday charts, you can see that the NDX did not charge up to that upper channel boundary as did several of the other indices, so it was weaker on this Keltner comparison. What about for tomorrow? The close proved ambiguous, and it looks about equally likely that the NDX could charge right up to about 2,795-2,800 or drop right down to 2,775 or perhaps even toward 2,765. If it charges up first, traders must be cognizant of the prior high from last week waiting as potential resistance, too, and gauge whether they want to begin locking in short-term bullish profits as that is approached or hold out longer. If the NDX should drop to test 2,775 or even 2,665, bears should be asking themselves the same question about locking in short-term bearish gains. If the NDX bounces from one of those levels, watch for potential resistance on 15-minute closes near 2,785 as there will be rollover potential there, with the emphasis always on "potential." If support at 2,765 is tested and fails to hold on consistent 15-minute closes, the NDX sets up a potential downside target near 2,740, although that support level could have moved several points either direction by the time it is tested.

Like the NDX, the RUT did not touch the upper channel boundary tested by the SPX and Dow. Unlike the NDX, however, the RUT still maintains that potential upside target, now at about 843 for the RUT.

Annotated 15-Minute Chart of the Russell 2000:

However, if the RUT were to gap lower tomorrow morning, maintaining early values below about 838, the upside potential target is less likely to be achieved. Consistent 15-minute closes beneath the 838 level set a potential downside target of 833-836, with that range probably narrowing toward the lower end of the range by the time it could be tested. If the RUT were to test that zone and then bounce, 838-840 should then be viewed as potential resistance on 15-minute closes. A failure of that 833-ish support to hold on consistent 15-minute closes sets up a potential downside target of about 825, although that could likely be pushed 5 points either direction, depending on the direction of early trading and the length of time it took to test that level, if it is tested.

So, what can we tell by this? We know that markets sometimes zoom up just under next resistance or down just above next support before an important FOMC number or release, and then park there with no little price movement but with rising implied volatilities until after the announcement. We know that indices then sometimes scream one direction or the other afterwards, sometimes with a quick sharp reversal which is itself then reversed, before we know the afternoon direction. We know furthermore that sometimes that afternoon direction is reversed the next day, after market participants have had an opportunity to pore over the release and decide what they think it really means for the market.

We can't predict much from knowing market behavior around events such as the FOMC minutes, particularly in emotion-charged trading environments and particularly with events looming in Europe, too. We can only go back to the charts. What I see on the short-term charts is that the SPX and Dow behaved more strongly than the NDX and RUT, on a Keltner channel basis. Both the SPX and Dow sometimes charge up to the upper boundary and then pull back and retest it again. It's the result of that retest that gives us more information about the next move. That remains a possibility for tomorrow, and it's likely they'll pull the other indices up, too, if they're charging higher to retest those channel boundaries. However, the Dow's dip was deeper than it should be for that scenario, and the NDX and RUT couldn't even manage a test of those upper channel boundaries today, looking weaker on a Keltner basis. The SOX, transports, BIX and even the high-flying RLX all looked weaker on a Keltner channel basis than did the SPX and Dow. Hold the possibility in mind of another charge up to retest those upper boundaries, where indices would wait out the FOMC Minutes, but don't yet give that action a probability status. I would want to see the BIX consistently above today's 159.58 high and the RLX above 625.30 before I believed too strongly in bounce potential tomorrow morning. If you want to see the bounce scenario play out in early trading, you want the Dow and NDX to quickly move above last week's highs and stay there and you want the RUT to at least attempt to place catch up with regard to last week's highs.

If you're in short-term trades, decide tonight how much risk you'll take into the FOMC Minutes announcement. Whatever happens tomorrow, remember to enjoy the gains the index makes if you're in bullish trades, but to keep ratcheting up stops as prices climb. Ask yourself how much risk you want to take on, especially before or in the immediate aftermath of the FOMC announcement. It only makes sense.