Market Internals


Market watchers had three days to stew over the likely reaction to Friday's shocking Non-Farm Payrolls number. With European bourses shuttered, the U.S. had only the reaction of the Asian markets and our own U.S. futures to guide them in their preparations. Not all Asian markets were open. The Nikkei 225 and Straits Times dropped 1.47 and 0.87 percent, respectively, but the Hang Seng appeared to be one of those indices that was shuttered.

Those Asian bourses might have been reacting to more than our jobs numbers and futures performance. At 9:30 PM ET last night, an important economic number from China surprised market watchers. China's CPI, measuring the change in the price of goods and services purchased by consumers, rose 3.6 percent, more than the anticipated 3.3 percent and the prior 3.2 percent. Food-related costs gained 7.5 percent over the year-ago price, even more than the 6.2 percent in the prior report. PPI, measuring the change in the price of goods purchased and sold by producers, dropped 0.3 percent, more than the anticipated drop of 0.2 percent.

Market watchers across the globe remain somewhat wary of developments in China lately. Too hot a growth number will force the government to take action or at least forgo adding more stimulus. Too fast a cooling will raise the specter of a hard landing. A Bloomberg article quoted the conclusion of Song Yu, a Goldman Sachs Group analyst based in Beijing, that this data pointed to only modest inflationary pressures. Those modest pressures might, however, limit the loosening policies the government had been thought to be undertaking beginning last month. Some economists quoted in that same article think that the inflationary pressures will abate as the year progresses. Whatever the conclusions, they certainly weren't perking up the Asian markets that were open.

Monday's Developments

Today's U.S. economic release schedule was mostly empty, although bill auctions did occur for the 4-week at 11:00 AM ET and the 3- and 6-months at 11:30 AM. With so little scheduled on the economic release front, attention turned to story stocks. Tales of lowered guidance, executive shakeups and interesting trades or swaps going on in the tech sector failed to warm up the markets, although they helped some individual stocks.

With earnings season looming this week, lowered Q1 revenue guidance from CKSW early this morning did not help the mood of the day. Revenues were guided to $21.6 million versus the prior $23.35 million consensus. Guidance for the full year was reaffirmed. The company advised investors that they shouldn't read too much into what was just seasonal first-quarter softness. However, CKSW dropped 1.97 or 15.72 percent to close at 10.56 and was still dropping in after-hours trading as this report was prepared.

It wasn't a good day to be an executive with Optimer Pharma (OPTR). The Board of Directors removed the chairman from his chairman position and terminated the CFO and VP. The chairman remained as a director but has been asked to resign. In a separate announcement, the company guided expectations for Q1 gross revenues to about $16.45 million, as opposed to the prior expectation of $29.4 million. The company emphasized that the $16.45 million was a 36 percent increase over Q4 gross revenues. OPTR dropped 0.57 or 3.99 percent.

It was probably a good idea to be one of the dozen or so employees of Instagram, however. Facebook wants to buy Instagram for $1 billion. While some market watchers quibble with that value for this photo-sharing platform, some analysts point out that it also means the acquisition of one of the top thinkers in the space, about the same age as the Facebook founder Mark Zuckerberg. Together with his other employees, he's been responsible for parabolic growth in a relatively short time period. Analysts note that Instagram's app has been one of the most popular in Apple's App Store. Others--not me, this time--pointed out the similarity in the era when companies without a clear focus on monetization were acquired for big sums.

Story stocks also included AOL, with the company announcing that it would sell more than 800 of its patents and the related applications to Microsoft Corporation. AOL has been broadcasting its desire to sell these patents, so the sale was not surprising, but it will grant AOL $1 billion for a company that reported $576 million in revenue in Q4. The company announced that shareholders would be receiving a "significant portion" of the proceeds. Market watchers still point to AOL's long fall from glory and complain about the company's "plan," but that didn't stop traders from snapping up the stock. AOL gained 7.98 or 43.32 percent and was still climbing in after-hours trading as this report was prepared. MSFT dropped 0.42 or 1.33 percent and was still dropping in after-hours trading as this report was prepared.

T-Mobile and prepaid carrier Leap Wireless exchanged spectrum today, with T-Mobile receiving Spectrum in several markets and Leap receiving it from T-Mobile in Houston, Galveston and Bryan-College Station in Texas and Phoenix in Arizona. The deal will go through upon regulatory approval. Leap (LEAP) dropped 0.31 or 3.68 percent.

Also enjoying buying was Xstrata (XTA.L), benefiting from the increased stake that Qatar's sovereign wealth fund took in the company, or at least the impact of that increased stake. That purchase brings fund QIA's stake to just above five percent, a Reuters article notes. Commodities trader Glencore has wanted to buy Xstrata, but major shareholders have until now opposed the purchase. The impression on the street is that QIA would be unlikely to object, making it easier for Glencore to buy Xstada.

A week ago, this Monday Wrap included a paragraph about Avon (AVP) turning down a $10 billion bid from Coty. Today the company named a new CEO, Sherilyn S. McCoy, formerly of J&J. The stock price dropped 0.73 or 3.12 percent.

Another familiar name played a role in the story stocks both last Monday and today. Last week, we heard about the $1,001 price target Brian White of Topeka Capital Markets placed on AAPL. This morning, he was again pointing to the anticipation of the iPhone 5 in Asia as being responsible for that price target. He speculates on the production and launch of a new phone with a 4G wireless connection, thinking that production could begin early in the summer, but that the launch would probably not occur until three or four months later. However, not all analysts agree with his exuberant take on the stock. BTIG Research downgraded APPL to a neutral status. No matter: AAPL gained 2.55 or 0.40 percent to close at 636.23. Wasn't it just yesterday that we were speculating on whether it could top $600? After hours, the stock had dropped back to 634.90 as this report was prepared.

By the end of the day, all those stew ingredients had translated into lower equities, crude, and dollar values, along with lower treasury yields. Many equity bourses had dropped more than 1.00 percent, and the RUT had dropped about 1.8 percent or 1.76 standard deviations.

How much damage was done? Let's look at charts.


Last Monday, the SPX had bounced, but this bounce was different. This time, the SPX could not make it back to the top of the rising channel in which it had been traveling. Since then, the SPX has established a short-term pattern of closing beneath its rolling-over daily 9-ema. Over the course of the last week, it has also tumbled through to the bottom of that channel again, hitting the 1369-1389 red-oval range marked on last week's daily chart. That range has since compressed to about 1375-1383, and I've changed its color to yellow so that the converging Keltner lines are more clearly visible.

Annotated Daily Chart of the SPX:

That potential support configuring has finally narrowed. On a Keltner basis, the SPX maintained the support on a daily close, but on a traditional charting basis, the SPX closed slightly below that rising price channel. The minimal breakdown below the channel and the close above the nearby potential Keltner support preserve the possibility that the SPX is doing nothing more than traveling back and forth in a rising channel and that it just overran the channel a bit. For that view to be preserved, the SPX needs to bounce soon and bounce hard enough to regain the 9-ema on daily closes.

If that support near 1375 is instead lost on consistent daily closes, the Keltner setup gives a potential downside target in the 1322-1337 region, although that range would likely narrow and move lower on any quick drop. I like the Keltner setup because experience has taught me how often prices cut through traditional levels of support and resistance to land right where the Keltner setup predicted they will go. The Keltner setup is as fallible as any, of course, so I would also point to the March low of 1340.03 as potentially strong support on daily closes, with this being historical support.

The market has a certain rhythm and symmetry most times. Due to those traits, I wouldn't be at all surprised to see the SPX drop toward 1340 if it loses support near 1375 on consistently daily closes. Then I wouldn't be at all surprised to see it attempt a bounce, up toward 1395-1400. To me, it would be the quality of that bounce that would tell us whether we're seeing a kiss-goodbye kind of test or renewed strength in the markets.

Alternately, if the SPX loses support near 1375 on consistent daily closes, it could drop straight toward that downside Keltner target. If that next level's support is then lost on consistent daily closes, a new target is set at the lowest red oval. I hesitate to mention that possibility because it's not a set target as of now and nowhere near any kind of high probability as a target. However, when prices start barreling lower, they can barrel quickly, and I wanted you to have this information in case anything should happen to precipitate a large drop this week. I'm not anticipating that and not trying to scare anyone. I opened a new May trade today, so I'm not trying to engender fear: just preparedness. In my own trades, I decide at the end of each day if I can defend my trades if the markets move to the next targets, either up or down, and that's what I want you to do, too.

On bounces now, I would watch for potentially strong resistance on daily closes near 1400, 1413-1421, and especially near 1447-1450. It looks as if the SPX has some downside shoring-up to do before it tests the upper end of channel again, but the close wasn't definitive enough to be sure of that. However, I would at least consider rollover potential if the SPX should bounce now or from one of those lower levels

The Dow has already hit and slightly breached the Keltner level analogous to about 1275 on the SPX. Will its March 12734.86 low be a lure drawing the Dow lower?

Annotated Daily Chart of the Dow:

From a Keltner perspective, the loss of Keltner support near 12960 on consistent daily closes sets up a potential downside target near 12587-12650, but the breach was minimal. Perhaps the Dow just overran support? We need more consistent daily closes beneath that support or above it to be certain.

However even if the Dow heads lower, it takes no special chart-reading skills to point to that March low and conclude that market participants might start stepping back in if the Dow drops toward and closely approaches that level. Whether that does or does not happen would probably have a lot to do with how that number is tested. If the Dow barrels right down through it on an all-day decline, I don't know that I would be too ready to buy. If the Dow hits it during the first 30 minutes of trading one of these days and quickly rebounds, maybe it might be worth a lottery-money try if you're bullish. However, not unless the Dow just meanders slowly down to that level on low volume would I use anything other than expendable lottery money to bet that it was going to turn around before also dropping into the Keltner target. It could. We just don't know, and we're talking about where risks lie. To me, the risk now is that the Dow will drop to 12650.

If the Dow jumps tomorrow, watch for potentially strong resistance on daily closes at the red 9-ema and then again near 13270-13300. A sustained breakout above that higher boundary on daily closes sets up a new target at the top green oval.

Less happily for bulls, a sustained drop through the 12650 zone sets up an ultimate downside target at the lower red oval. Again, I don't like to mention that possibility because it looks scary on the chart and it's not yet a probability. That target represents a remote possibility. However, when drops get started, they can accelerate quickly, and a lot can happen in a week when I return to update targets.

Unlike the Dow and SPX, the NDX's retreat has done nothing more serious than test its breakout status on the Keltner charts.

Annotated Daily Chart of the NDX:

The danger seen on that chart lies in the wide spacing between potential Keltner downside targets, where support also might be found on daily closes. The NDX closed the day right in the breakout marker zone, not above it. If the NDX closes much below today's low and particularly below 2908, it sets up a potential downside target of 2655. While doing so, it also erases its breakout status. Was today just an overrunning of potential support or was the failure to bounce back a sign we should heed? We'll learn more tomorrow and the next few days.

The current pullback still looks like a possible bull flag pullback, but today it slipped into a less-bullish looking version. If it is a bull flag destined to break to the upside, we should know soon. If 2908 holds on consistent daily closes and particularly if 2740 does, the NDX may bounce. Traders should then carefully watch any retests of resistance on daily closes up to about 2756. If this has been a bull flag pullback, the NDX should be able to break through that resistance again. If not, the bull flag thesis is undone.

If the NDX drops hard through 2700-2709, it's also undone. That next Keltner support level is going to be pushed lower and might be anywhere between 2600 and the 3/2 high of 2650 by the time it could be tested. If that support level should be tested and then hold on consistent daily closes, watch for the next higher failed support to act as potential resistance on any retests. The NDX has been on a long uphill run, and we don't know whether some weak hands need to be shaken out or if bulls will hold strong on pullbacks.

Lower potential targets are marked in case the NDX's already discussed potential support levels fail. I'm not putting them here to scare anyone or predict they'll be tested, but only because I think in terms of "what if" or "if, then." If this support is lost, then that is the new potential downside target, and what will I do to hedge my positions if that happens, for example.

The RUT clearly fell out of the rising wedge in which it had been climbing.

Annotated Daily Chart of the RUT:

The RUT's daily candle looks a little lonely there by itself hanging out between support and resistance, doesn't it? There I go, anthropomorphizing again. However, the chart setup shows the daily candle poised neatly between the nearest strong resistance on daily closes at the conjunction of the rising wedge's lower trendline and the rolling-over 9-ema, and the conjunction of the Keltner support levels and the March low, at 785.41.

Which is most likely to be tested first? This chart doesn't predict that. However, if the RUT should climb right back up into the 820-825 zone, bulls would do well to be aware of rollover potential. If the RUT does drop to 780-789, bears should be aware of bounce potential. While I think it possible, if not yet probable, that the RUT will eventually fall to and maybe through 780, I hope that a break of that support won't occur until there's plenty of warning. Be aware, however, that a plunge right through the 780 level that isn't reversed within a day or so can set up a potential downside target at the lower red oval.

If the RUT should this week scream right back up through 825 and not reverse within a day or so, it sets up a potential upside target near 850, where resistance might be found on daily closes.

These Monday Wraps have suggested that the BIX and RLX number among the indicator indices that have demonstrated strong momentum runs drawn in parabolic shapes on the charts. While other indices such as the transports were already signaling something wrong with the underpinnings of the rally, these have been going strong although the BIX's "bull flag" pullback is getting longer in the tooth than it should be if it's truly bullish. I've been suggesting that subscribers keep these indices on their radar screens and not believe too strongly in any pullbacks in the SPX and Dow in particular that aren't accompanied by meaningful pullbacks in these indices. The BIX has begun to take on a rounded top shape that should keep bulls watchful. However, so far, the RLX has not yet convincingly violated meaningful support, and its pullback still looks like a possible bull flag pullback.

Annotated Daily Chart of the RLX:

With SVU due to report tomorrow and other retailers beginning to report this week, we'll soon see if the exuberance on this chart can be sustained. The transports ($DJT on many charting services) dropped before others of these indicator indices but didn't drop out of their congestion zone today. Last week's support held. The SOX continued dropping and has set up a lower potential downside target near 402-408, but the declines over the last three trading days have produced small-bodied candles indicative of indecision.

It should go without saying that AAPL, reaching another new closing high today, should also be used as an indicator, although it's not of course an index. You don't have to get fancy or know all the ins and outs of AAPL's behavior. Just put up a chart with the 10-sma or my preferred 9-ema and watch how AAPL's daily candles behave with respect to that average. Do they close above or below that moving average. Is the average itself still climbing or has it begun flattening or even rolling down? Don't get too convinced of a change in tenor by a few points' close below that average or a single day's close slightly below it, but do watch for a change in overall tenor or a larger break of the support to signal that something more serious is going on. I don't trade AAPL, so I'm not giving investment advice. Rather I'm suggesting that you watch it to help you determine when bulls' strength might be flagging.

Tomorrow's Economic and Earnings Releases

Tonight, Japan announces its rate decision and holds a press conference, with no specific time listed on economic calendars. While that event can certainly impact currency trades and our futures, too, more attention might be paid tonight to FOMC Chairman Ben Bernanke's delivery of his speech "Fostering Financial Stability" at the Federal Reserve Bank of Atlanta's Financial Markets Conference at Stone Mountain. That begins at 7:15 ET, with the speech usually released a few minutes earlier, so future might begin reacting immediately when they reopen tonight.

Two weeks ago, FOMC Chairman Bernanke addressed the National Association for Business Economics 2012 Policy Conference in a speech titled "Recent Developments in the Labor Market," spending quite a bit of time describing a disjunction between the GDP and expected unemployment numbers. Unemployment wasn't as high as Okun's law, an economic law linking the two, predicted it should be. He carefully laid out the possible explanations, and said, "Moreover, we cannot be sure that the recent improvement in the jobs situation will not be reversed." It was during that speech that he uttered the words "accommodative policies" that so cheered the market that Monday. Now that his warnings about that disjunction have proven apt, market watchers will want to see what he's going to say about accommodation. With earnings season upon us but with results not yet known, I would not think he can be too specific. I guess we see tonight.

Our monthly economic releases for tomorrow include the IBD/TIPP economic Optimism and Wholesale Inventories, both at 10:00 ET. Neither normally moves the markets. In addition to those monthly economic releases, 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. At 12:45 pm, Federal Reserve Bank of Atlanta President Dennis Lockhart will address the Stone Mountain Conference. He is a voting member this year.

The treasury auctions include the 4-week at 11:30 and the 3-year note at 1:00 pm ET. The biggest market movers tomorrow, however, might relate to the kickoff of the earnings season, with AA and SVU due to report. SVU's report will appear before the market open in conjunction with those weekly retail numbers, with AA's after the close. SVU's report may provide insight into how higher fuel costs are impacting some retailers. With retailers leading the way higher as described in the chart section, this report may garner some attention.

Also on tap tomorrow is YHOO's all-staff meeting. As was noted in this weekend's newsletter, the meeting addresses the planned reorganization and new management structure.

What about Tomorrow?

Most indices climbed off their lows this afternoon, but their climbs looked suspiciously like zig-zagging bear flag climbs.

Annotated 30-Minute Chart of the SPX:

The SPX's climb off the day's low looked suspiciously like a bear-flag climb off expected support. The downturn at the close may occurred near one level where a bear flag could be expected to roll over again. A retest of the 1378-1379 level looks possible tomorrow, but so does a climb to test 1392-1393. At each marked level, watch for rollover potential. I wouldn't even begin to feel any certainty in the sustainability of a short-term bounce until and unless the SPX sustains 30-minute closes above about 1402. If the SPX should head down tomorrow and sustain 30-minute closes beneath 1375, look to the daily chart for guidance on next downside targets.

The Dow's setup is similar on the 30-minute intraday chart.

Annotated 30-Minute Chart of the Dow:

The Dow's chart also looks like a bear flag climb that is rolling back down. If the Dow dips tomorrow and doesn't find support at today's low, watch the daily chart for potential support. If the Dow climbs, watch the 13026 and 13100-13110 zones for potentially strong resistance. I wouldn't begin to feel comfort in any rally until the Dow sustains 30-minute closes above about 13110.

On a 30-minute chart, the NDX looks stronger than the SPX and Dow, at least in comparison to the Keltner levels tested. The NDX found support above the Keltner level that the other indices broke through. Because it showed more adherence to the 15-minute chart's levels, I'm switching to a 15-minute chart for the NDX.

Annotated 15-Minute Chart of the NDX:

What isn't visible on this chart is a confirmed double-top formation on the NDX's 10-day intraday chart, with tops at 3/27-3/28 and 4/03. The confirmation by a move down through about 2,740 set up a potential downside target of about 2690. The NDX has not wanted to stay below the confirmation level. There's some doubt about the potential for that downside target to be met, but I would keep it on my radar. Bulls want to see the NDX spend as much time above that confirmation level as possible to begin to erase the lower target as a viable one.

What is visible on this 15-minute chart? Like the other indices, the NDX found resistance at the end of the day and pullback back from a zig-zagging climb. Therefore, the possibility of a retest of potential support on 15-minute closes near 2735 and maybe even near today's low remain. I would want to see consistent 15-minute closes above first 2758 and then Thursday's high of 2764.21 before I believed too strongly in the sustainability of any short-term rally. If the NDX could sustain those higher levels, it sets a potential upside target at the top green oval. If instead it drops through yesterday's lows and doesn't quickly bounce back, look back at the daily chart to set potential downside targets.

The RUT's chart showed similarities with the others shown here.

Annotated 30-Minute Chart of the Russell 2000:

The day's trading had produced a small bullish formation that predicted a rise up toward 808.50, but the RUT couldn't quite make it there before dropping again. That's the next place to watch for rollover potential if the RUT should climb to test it, with other possible upside targets marked. I would not believe too strongly in a short-term rally's sustainability until the RUT could sustain 30-minute closes above about 822.50. The next upside target would then be set near 836.40 although it would likely have been pushed higher by then by any climb. If the RUT should drop through today's low instead and not quickly bounce back, look to the daily chart for next potential downside targets.

By the end of the day, the SPX's and NDX's charts remained ambiguous about whether those indices were violating important support or clinging to it. I don't count a one-day violation by a few points as a sound confirmation of weakness. Yet I'm looking now toward potential next downside targets and thinking about whether my trades are set up to handle quick drops to those levels, and I think you should be making those just-in-case decisions, too. Especially as we move closer to option expiration next week, you may have fewer adjustment choices in some trades. Toward the end of this week, they become the equivalent of weekly trades, with all the heightened excitement and danger of weekly trades.

Both the VIX and RVX broke out above their 50-sma's today, a movement that many market watchers will have noted. The RUT's chart setup is one that suggests a deeper decline to the 782-785 region, although not necessarily before a rally to test resistance, a rally that better hold if that lower target isn't going to be tested. The Dow's chart has begun to get a rounded-top appearance. The failure of our indices to bounce may weigh even more heavily on the European bourses overnight, with Europe dealing with its own problems. Spanish and Italian bond yields have been rising, and Italy has another auction on Thursday.

Before we get too gloomy, however, we have to remember AAPL's chart. Bulls have been rewarded every time they've bought dips, and until they begin getting burned, they're likely to go on buying dips. I no longer think in terms of predicting where the markets are going to go, but rather thinking in terms of what will happen to my trade if they head to next targets in either direction. Right now, there's uncertainty about that next direction. Please don't go home each day with more risk in your portfolio than you can stand. What's the gamma or delta level that will measure that? Neither: it's the "can I sleep with this trade on or do I stay up all night watching CNBC or Bloomberg" level that should matter. Reduce the size of your positions if necessary. Buy insurance if you need it. Options were created to hedge risk. Use them that way. And good luck.