Market Internals


This morning, as market watchers awaited Citigroup's (C) earnings, a television commentator talked about the upcoming report. He noted that whatever C's report showed, investors had already studied the reports from quality financials last week. C's report might not matter that much, he concluded in a disparagement of C's importance.

U.S. investors had woken to slightly higher U.S. futures. This was despite mixed performance from Europe's bourses after discouraging developments in Europe. The FTSE 100 was to end the day down 0.77 percent, with the DAX and CAC 40 up 0.63 and 0.51 percent, respectively. Spain's IBEX 35 dropped 0.57 percent and Portugal's PSI 20, 0.83 percent. Spanish bond yields, garnering much attention last week, had climbed above 6 percent by the time most U.S. market watchers were waking this morning. The flight away from Spanish risk certainly moved at least in part to Germany. Bund yields dropped to recent record lows. Spain had called for the ECB to buy more Spanish bonds, but a Dutch official disparaged that idea, saying that the ECB was "very far" from taking that step.

Dissension was apparent in Europe, with French President Nicolas Sarcozy calling for an extension of the ECB's mandate, to call for the central bank to support economic growth. Germany's spokesperson disparaged that entire idea, Reuters noted. In addition to these developments, Europe's trade surplus was lower than expected. German cars and machinery sold well in other countries, but European households and businesses slowed their buying, impacted by the domestic slump.

Other news about Europe proved disconcerting. Moody's Investors Service was expected to begin releasing results of a review of more than 100 European banks this week. Instead, Moody's announced that it would delay the review until May. Moody's claimed that it was "taking an appropriately deliberate approach during this review process" (Marketwatch, Daniel). Some print articles, however, pointed out that any major downgrades of European banks at this sensitive time could thwart efforts to contain fears of a brooding financial crisis. Suspicious market watchers must have questioned whether Moody's needed more time or hesitated to release distressing results in such a precarious atmosphere.

Before the U.S. cash markets opened, market watchers got their first look at C's earnings report. Including special items, C reported earnings of $2.93 billion or $0.95 a share. Excluding the items, the company reported earnings of $1.11 a share. Analysts had guided expectations to $1.01 a share on revenue of $19.93 billion.

Profit beat expectations, but headlines concentrated on the disappointing drop in revenue. The reported $2.93 billion in earnings was less than the year-ago $2.99 billion. Part of the reason for the better-than-expected profit had been a drop in expenses, not exactly the most encouraging way to beat expectations. Revenue from the investment banking business and securities trading dropped 12 percent from the year-ago quarter. That revenue category did rise 65 percent from the prior quarter, however. The company's CEO, Vikram Pandit, also warned of "much macro uncertainty."

Not long after that report surfaced and markets began reacting, several economic releases also appeared at 8:30 AM ET. Those included the Empire State Manufacturing Index, retail sales and core retail sales, which exclude automobiles. The TIC Long-Term Purchases followed at 9:00 AM ET.

The Federal Reserve Bank of New York reported that the Empire State Manufacturing Index measured 6.6, a disappointment. Prior to this report, this year's reports had ranged from the January 17 report at 13.5 to the March 15 one at 20.2. Experts predicted a drop to 18.1 for today's report, so that 6.6 number measured far lower than expected.

In these Monday reports, I've been pointing to the parabolic rise in indices related to retail sales. During the last week, the RLX had dropped heavily early in the week and then zoomed up to close the week at what had been the prior week's support level. Was former support now resistance? Perhaps today's report would give some insight. Despite the parabolic rise in indices such as the RLX, the Census Bureau reports of retail sales had not always matched expectations, however, with the January 12 and February 14 reports both missing expectations. The March 13 release met expectations at 1.1 percent growth.

Market watchers predicted a gain of only 0.4 percent for the current report on March's activity, down from the prior 1.1 percent, but the gain measured 0.8 percent. Core retail sales exclude automobiles. They were expected to climb 0.6 percent, down from the prior 0.9 percent, but the gain measured 0.8 percent. Some print sources pointed to strong demand for consumer discretionary goods as leading retail growth, but a 1.1 percent rise in gasoline prices certainly contributed, too. Furniture and electronic and appliance sales grew 1.1 and 1.0 percent, respectively.

Pre-market futures had pulled back after C's report and before these economic releases, but then zoomed to a new overnight high after this report. When the cash market opened a little later, the RLX zoomed up to test resistance, but then as quickly pulled back before bouncing again. The day's candle was a doji, indicative of indecision after the RLX's resistance test.

You would think no disparaging words would be spoken about this report, but MarketWatch did have some to say: "We shouldn't expect that [strength] to continue into spring and summer." An unseasonably warm winter had spiked sales of building supplies, the article noted.

The Department of Treasury reported that the difference in value between foreign long-term securities purchased by U.S. citizens and U.S. long-term securities purchased by foreigners was $10.1B. The difference had been expected to drop to about $40.7B from the prior $101.0B.

The prior $101.0B was also revised higher to $102.4B. When the actual number proves less than expected, the effect is typically negative on the dollar. The dollar did drop toward the bottom of a bull-flag pullback on its 30-minute chart immediately after the report, before stabilizing, and then dropping again. Because the Department of the Treasury releases this number about 45 days after the month in question ends, we're getting a backward look, but this does tend to move currencies, and, therefore, equities and commodities. Of course, Jim Brown detailed another possible reason for dollar volatility in this weekend's newsletter: the Chinese action this weekend to allow the Yuan to vacillate in a wider band. Check the weekend Wrap for more detailed information.

Monday's Other Developments

The day's economic releases continued past the cash open. At 10:00 am ET, the Census Bureau reported Business Inventories at 0.6 percent, with the prior report at 0.7 percent and expectations pegged at another gain of 0.7 percent.

The NAHB reported the Housing Market Index, a diffusion index, with 50 the line of demarcation between a favorable outlook and a negative one. The past three reports have debuted at 25, 29, and 28. Experts had predicted that this week's report would remain flat at 28, but instead it dropped to 25. The commentary along with the report noted that the "interest expressed by buyers in the last few months has failed to translate into expected sales activity." Buyer traffic fell, as did each of the index's components. Challenges included "particularly tight credit conditions for builders and buyers, competition from foreclosures and problems with obtaining accurate appraisals." The Midwest and South posted declines, the West showed no change, and the Northeast posted a four-point gain to 29. The $DJUSHB, the Dow Jones U.S. Home Construction Index, dropped off the day's high and closed near Friday's close as it chops out another congestion zone matching that formed in late February. The NAHB Housing Market Index knocked the feet out from under what was already a tentative early rally in other indices, too, and the day was to end with mixed performances on U.S. markets.

Story stocks today included Texas Instruments (TXI), set to be added to the NDX and NDXE before the market open on Monday, April 23, 2012. The stock ended the day down $0.11. TXI will replace First Solar, Inc. (FSLR). CAT also figured among the story stocks, upgraded by BofA. It ended the day up $0.85.

Investors in Endocyte (ECYT) will have a story to tell this evening. The stock more than doubled today after Merck (MRK) announced that it had bought the rights to Vintafolide, the company's experimental cancer drug now in a Phase III clinical trial for ovarian cancer and a Phase II trial for non-small cell lung cancer. Immediately after the bell, the stock was quoted at $7.62, up $3.82.

After or near the market close this afternoon, RIMM announced that it had hired an advisor to "weigh strategic options." Although few were surprised by the news, it certainly wasn't news to someone. Some market watchers were reporting unusual trading volumes for RIMM even before the report. RIMM jumped and was last trading at 13.42 as this report was prepared.


The SPX now looks vulnerable to a drop to 1325-1334, but any consistent daily closes above about 1381 could make a 1402-1414 test possible, too.

Annotated Daily Chart of the SPX:

The SPX now looks vulnerable to a drop to 1334-1336 or perhaps even as low as 1327 before next support is found. However, consistent daily closes above the 9-ema now at 1381.05 will set up a potential target near 1403-1416, with that upper range likely narrowing and moving higher if the SPX should jump higher. Unfortunately a climb into that 1403-1416 range would constitute a resistance test but wouldn't tell us much yet about the ultimate direction of the SPX unless charts had set up differently by then.

It's possible that we could see a churning between last week's low and that 1403-1416 range for up to at least a couple of weeks. If you look back to February, you can see that the SPX spent many sessions churning around the SPX's current level back then. The real threat occurs if the SPX breaks below last week's low and maintains closes below that low, and such a break could come suddenly. Such a break could produce that next support test.

As always with any of these Keltner or other strong potential support levels, watch for bounce potential at that 1334-1336 level if it should be tested. Then watch for prior support to possibly convert to resistance on retests. Unfortunately, the chart setup seems to be predicting that the next support test is more likely than the next resistance test, but chart setups are not crystal balls. Prepare your trades to endure either test.

If the SPX should maintain consistent daily closes below about 1327, then it's set a much lower potential downside target. In this case, trades should be set up to endure a strong downtrend interrupted perhaps by rabid relief rallies.

Like the SPX, the Dow's chart setup suggests that lower prices are next, perhaps around 12600-12608 for the Dow.

Annotated Daily Chart of the Dow:

The Dow's consistent daily closes below its red 9-ema and other potential resistance leads to the threat that a support test of the 12600-12608 level might be next. If that happens, watch for the possibility of a bounce back up to test the current resistance level again. The Dow could churn in a congestion zone equivalent to the one in which it churned for several weeks beginning in the middle of February. Those who want the Dow to burn off any overbought excesses by sideways movement want to see it maintain support above that 12600-12608 zone. A failure to maintain that level on consistent daily closes sets up the possibility of a much steeper decline, perhaps punctuated by sharp relief rallies.

Consistent daily closes above about 12950 would set up the possibility that the Dow will reach toward 13150 or even 13280-13300 instead of falling to test support. Be prepared for rollover possibilities if the Dow should bounce up toward 13150 or 13280-13300 in case such a rollover occurs.

The NDX's chart set up differently than the SPX's and Dow's, and anyone who has followed AAPL's chart understands why. However, the NDX just took a different route down to the same Keltner level. Unlike those previous two indices, it has not yet set up a new downside target, but it's verging on doing so.

Annotated Daily Chart of the NDX:

Consistent daily closes below the daily 45-ema, probably at about 2667-2670 tomorrow, sets up a lower potential target, now in a broad range from 2522-2573. If the NDX breaks through support and continues down, the band will likely narrow, and perhaps will narrow toward the lower end of the range.

Of course we can all see potential historical support converging with round-number support at 2600, and bearish traders should anticipate bounce potential at that level if it's tested. Yet, as should be apparent from these charts over the last weeks, the Keltner levels sometimes trump the traditional expectations, and we see drops or climbs right to where they're suggesting prices will go. Therefore, if I were in a bearish trade, I'd certainly have a plan for how I would treat the 2600 level if it was tested (Locking in partial profits? Ratchet profit stops closer?), but if I were in a bullish trade and desperately needed the NDX to turn around, I wouldn't count on that happening before the downside Keltner support is reached. Be prepared for the worst-case scenario in either case.

Keltner channels are not crystal balls and the "most likely" setup isn't always fulfilled. If the NDX instead rises and sustains daily closes above its 9-ema, the red line seen in the chart above, it sets up a potential upside test of the 2758-2775 range. If that range is reached, watch for rollover potential.

By this weekend, the RUT's daily chart had suggested a potential retest of last week's low. That setup remained today.

Annotated Daily Chart of the RUT:

Until and unless the RUT maintains consistent daily closes above its 9-ema, lower seems more likely than higher for the RUT. A retest of last week's low, with a perhaps slightly lower low, seems possible if not yet a given. Anyone wanting to see steady or higher prices wants the RUT to at the least maintain daily closes at or above the nearest red zone on that chart, from about 777-787. Consistent daily closes beneath 777 and particularly beneath 775 set up the potential for a much deeper decline.

Between that 777-787 zone and the red 9-ema, the RUT is caught in a chop zone. Zigs here and zags there within that chop zone predict little. Consistent daily closes above that 9-ema and particularly above about 814 are needed to set up the potential for a retest of the black long-term trendline shown in the chart, with that trendline crossing at about 833. If I had bullish gains on any such retest, I would consider how I would protect those gains from rollover possibility. Possibilities include locking in partial or full gains or ratcheting up profit stops.

I've been advising that in addition to these major indices, market watchers might also watch what I call "signal" indices and stocks. The transports, BIX and BKX and RLX are among the signal indices I watch. The transports alerted us that something funny was going on when they failed to zoom up again in early April to test their late March highs. The BIX had never fallen back far during that period and had instead been in a tight coil, but then broke to the downside. Like the RUT, the BIX remains trapped between its 9-ema on the upside and its 45-ema on the downside, and consistent daily closes above the 9-ema or below the 45-ema are needed to break the deadlock.

The RLX and AAPL were still leading the pack last week, however. Anyone looking at AAPL's chart today noted its steep decline as the stock plays catch up to the downside. The RLX's chart diverged from the NDX's and AAPL's, however. Will it continue to do so now that the NDX and AAPL have both pulled back?

Annotated Daily Chart of the RLX:

The RLX started tipping over today, as did the NDX and AAPL, but managed to avoid their fate. Still, it formed a doji at resistance, certainly not a strong affirmation of strength. Consistent daily closes above about 621.50 suggest a retest of the late March high. Consistent daily closes beneath about 599.70 suggest a steeper decline to 569-578, showing that another of the momentum indices has toppled over. Today, the BIX provided no strong clues either direction.

If I could do a charts-only Wrap, I would, but we have to fit everything in. Some choices must be made, and even I believe that we should also be aware of the pressures that might be produced by upcoming economic or other events. The dollar churned within a congestion zone, attempting to break to the upside out of a bull-flag looking pullback and then falling back to 79.71. A horizontal trendline at 79.70 would show the dollar coiling around this level for several months. No answers there.

Tomorrow's Economic and Earnings Releases

Tomorrow's important economic releases begin in the wee hours of the morning and they begin in Europe, not here in the U.S. Tomorrow morning at 5:00 am ET, the German ZEW Economic sentiment will be reported. Experts forecast that the ZEW will drop to 20.2 from the prior 22.3. The Eurozone CPI will also be reported.

The 8:30 am ET release slot in the U.S. will also be an important one, particularly after today's disappointing NAHB report. The Census Bureau reports on Building Permits and Housing Starts. Building Permits are expected to number 0.71 million, slightly lower than the prior 0.72 million, and Housing Starts are also forecast to number 0.71 million, up slightly from the prior 0.70 million. These numbers can and sometimes do impact U.S. markets.

Then, fifteen minutes before the bell, the Federal Reserve releases the Capacity Utilization Rate and Industrial Production numbers. The Capacity Utilization Rate is expected to dip slightly to 78.6 percent from the prior 78.7 percent, and Industrial Production is expected to rise 0.4 percent, as contrasted with the prior 0.0 percent change. Market experts consider Capacity Utilization a leading indicator of consumer inflation. They believe that production tends to react quickly to changing economic conditions, but both Capacity Utilization and Industrial Production are deemed only moderately likely to move markets.

Of course, the weekly ICSC-Goldman Store Sales at 7:45 AM ET and Redbook chain store sales at 8:55 are scheduled as usual for each Tuesday.

Important or closely watched earnings announcements tomorrow include those from GS (before the open), IBM , INTC (after the close), USB (before the open), and YHOO (listed after the close in one report, but time not detailed in another). Unlike those reporting disparaging words about C's importance, all consider GS a financial to watch.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX wasn't giving many clues as the chart formation appears to be set up for a possible upside test tomorrow morning but the Keltner levels hit suggest a dip. The upside setup would be confirmed by consistent 30-minute closes above about 1374-1375. If the SPX gaps above that level or stays above it on consistent 30-minute closes, a test of 1381-1383 appears possible. Traders should be aware that such a test would meet the upside targets for the short-term bullish formation on the chart. Rollover potential exists there. However, if the SPX can maintain 30-minute closes above about 1375, then a test of 1403-1405 seems possible. This would conform to a potential target seen on the daily chart, too.

However, the other setup must be discussed. If the SPX instead dips down tomorrow morning and fails to maintain 30-minute closes near 1365, it sets up a downside target that is now at about 1359 but should be lower tomorrow morning on any downturn. I would count on a retest of last week's 1357.38 low if this setup is the one fulfilled tomorrow. If the SPX pierces last week's low and doesn't reverse within a couple of hours at least, then I would suggest looking back at the daily chart's next downside target and protecting your trade for a possible test of that level.

Annotated 30-Minute Chart of the Dow:

We see a similar setup for the Dow, only the Dow's setup seems to give a preference to the downside scenario. The Dow appears slightly more likely to dip toward a test of 12830-12832 than it does to rise first to a test of 13003-13005. Consistent 30-minute closes outside those levels are necessary to set the next targets, now at about 13167 on the upside and 12746 to the downside, but likely to be pushed wider by any early action in their direction.

If the Dow breaks through last week's low and doesn't bounce back within a couple of hours, look back to the daily chart for possible downside targets. A break above 13000-13005 that isn't reversed within a couple of hours sets up a potential upside target near 13167, although that's likely to be pushed higher if the Dow moves that direction quickly.

The NDX's chart looks as different on the 30-minute chart as it did on the daily one.

Annotated 30-Minute Chart of the NDX:

With the SPX and the Dow, charts have predicted possible targets near last week's low, but the NDX's target was below that low and it's been met. That should serve as a warning for those watching SPX and Dow-related trades that those indices could also meet or exceed their short-term downside targets.

What's next for the NDX? The daily chart targets should be watched, but the NDX hasn't yet violated daily chart support. Be aware, however, that bullish traders don't want to see the NDX linger below today's low, certainly not into tomorrow's close or any days beyond tomorrow.

What if the NDX bounces? The first change in tenor needs to be sustained 30-minute closes above the 30-minute 9-ema, with the 9-ema currently at about 2672.50. That would set up an upside short-term target near 2694, although I would suspect that it would be pushed higher on any short-term rally. Watch for potential resistance on 30-minute closes at the 45-ema that marks this target/resistance level. A minor change in tenor would be marked if the NDX can sustain 30-minute closes above the 9-ema, but it needs to next maintain 30-minute closes above this 45-ema if the change in tenor is anything more than very minor. If the NDX can sustain 30-minute closes above the 45-ema, the next target is near 2716, although I would suspect that it, too, would get pushed higher on any strong short-term rally. I would certainly watch for rollover potential at each of these target levels. The next potential upside target is marked on the chart, too.

The RUT's 30-minute chart was giving zero clues as to next direction.

Annotated 30-Minute Chart of the Russell 2000:

The RUT seems as likely to climb toward 805-806 as to drop toward 790-793 and vice versa. A failure to maintain 30-minute closes above the 790-ish area sets up a potential retest of last week's lows. Traders watching a failure at last week's lows that isn't reversed within a couple of hours should look to the daily chart for next targets.

Prices that bounce above 805-806 and maintain prices above that level set up a potential short-term upside target at 819-821. Traders should watch that level for rollover potential if it's tested.

Now for what I really think: For the last couple of weeks, I've warned that the indices might drop into strong support and bounce from that support, as they did, but that the price action should be watched for rollover potential. I am unhappy that some of those actions--the quick drop to strong Keltner-outlined support, the bounce that has so far failed to clear next resistance--have been fulfilled. They did not fit a bullish scenario but rather a bearish one.

As I study charts now, I see charts that show the potential for churn between strong support and strong resistance for perhaps up to another two to three weeks before we know whether strong support or resistance will be broken. We must now calmly assess how our trades will function if the break is to the downside, realizing that such a break could now come at any time, if it's going to come. We can't count on two to three weeks.

Last Monday when I composed the Wrap, I included some just-in-case downside targets, and they're marked again by red ovals on the daily charts I've included. They seem impossible, and I want to assure readers that they have not been set as "official" targets, whatever that means even in Keltner terms. However, I think in terms of "what if" and "if/then" in my own trading, and I'm thinking about what would happen if I were to wake up one day with a major bank collapsing in Europe, and the RUT opens below about 777 and should stay there throughout the day. I don't predict that will happen. I am not scared of it happening. I'm just assessing what will happen to my trades if the RUT and other indices head down to those potential and seemingly impossible downside targets. I don't want to over adjust my trades and make them suffer if the break should be to the upside, but I do want to calmly assess how I want to approach such a possibility. I want you to do it, too. Would a cheap OTM put help flatten out your downside risk, for example, if you can find one? Do you really want to make this month the month you size up in your trades and double their size, since you've traded so well the last two months, or would it make more sense chartwise and seasonally to wait a bit and see what develops before you size up as we head into the "go away in May" season?

It's my hope that the prices will chop sideways long enough that the bearish potential is unwound that way, so I'm thinking optimistically but preparing realistically.