On a day with no important economic releases here in the U.S., Europe, California and erring companies set a negative tone.

Market Internals


This morning, we woke to news that Italy's 10-year bond auction had resulted in more demand and a lower yield than the last Italian bond auction. That was seemingly good news. The last bid-to-cover rate had been 1.5, and this one was 2.3. The yield for this auction dropped to 5.66 percent from the last 5.84 percent.

With print and television commentators reporting on Greece's political stalemate and speculating on the country's exit from the euro, Italy's bond auction didn't matter. The yield might have been lower than the last 10-year auction. However, it was higher than it recently had been, along with higher yields in Spain, too. Today was the last day of the Greek government's three-day attempt to build a coalition and avert a new election. With some vital participants deciding not to attend Monday's meeting, those efforts seemed doomed.

Greece will likely not receive the next set of bailout funds if it has no stable government to negotiate the receipt of those funds. Neither is it likely to receive them if the country refuses to adhere to the stipulations previously set down by various entities as preconditions for receiving those funds. The rising strength of the SYRIZA party and its young leader who promises that Greece can renege on the agreed-upon terms yet still stay in the euro throws the impact of a new election, if held, into question.

In the premarket session, U.S. futures turned sharply lower. The FTSE 100, CAC 40 and DAX all traded down more than 2 percent as most U.S. traders first woke to prepare for their trading day.

Monday's Developments

Europe's bourses were to end sharply lower but had bounced off their lows by the close of trading. They had steadied as our cash markets opened and dropped sharply lower but then seemed to stabilize. Perhaps the end-of-day bounce in European bourses had nothing to do with our open but instead was merely the result of shorts locking in some profits. The FTSE 100 closed 1.83 percent lower; the DAX, 1.79 percent; and the CAC 40, 2.29 percent.

In the U.S., reporting agencies scheduled no economic releases for today other than 3- and 6-month bill auctions at 11:30 AM ET. We were free to react to what occurred overseas or what surprises our own companies might deliver.

Today, we had story countries, story stocks and also a "story" state. Yesterday's New York Times reported on a dramatically increasing budget shortfall in California. Today Governor Jerry Brown held a press conference confirming that California's crisis is worse than expected. He presented a plan for dealing with the shortfall. The projected $9B deficit has billowed to $16B.

Story stocks included JPM (35.79, -1.17 or 3.17 percent), of course, with news this weekend that the company had accepted the resignation of its formerly highly respected chief investment officer. She had been with the company for decades. She likely will not be the last to leave, others speculate. JPM climbed a cent off the close in after-hours trading, as of this editing.

JPM's performance may have soured interest in financials, which dropped more than most sectors. However, more than JPM's misstep was at stake, as they will suffer if the EU crisis deepens.

Yahoo Inc. (YHOO, 15.50, +0.31 or 2.04 percent) also figured among the story stocks, announcing its third CEO in three years. Daniel Loeb's hedge fund also received three board seats. Loeb had recently censured the just-replaced CEO, early reports noted, but later news programs added that the leaving CEO has also just been diagnosed with thyroid cancer. YHOO did not specify a reason for his leaving. YHOO dropped ten cents off its close in after-hours trading, as of this article's editing.

Story stocks also included Best Buy (BBY, 19.56, +0.28 or 1.45 percent). The company announced Saturday that Hatim Tyabji would succeed Richard Schulze as Chairman of the Company. Former Chairman Schulze will maintain an honorary position as Chairman Emeritus. In other firm-related business, an outside law firm has concluded that the company's former CEO, Brian Dunn, had violated company policy and showed poor judgment when a close personal relationship had a negative impact on the work environment. However, no misuse of company funds was detected. The stock climbed a cent off its close in after-hours trading, as of this editing.

Avon Products (AVP, 20.96, +0.77 or 3.81 percent) was back in the news today. The company received a sweetened deal from Coty. AVP said its board would give its answer within a week. The stock dropped two cents off its close in after-hours trading, as of this report.

Let's look at charts.


Last Monday, I noted that many indices had lost the support of their 9-ema's on daily closes. They had, as a result, set new downside targets. The 9-ema's are always red on my charts. The 45-ema's, also a moving average I watch, are peach-colored. I can't annotate each average on the charts without rendering them too busy.

However, these moving averages can be set up on your own charts and watched there. Some traders will prefer setting up the more familiar 10- and 50-sma's. It's a personal preference. What's important is that you familiarize yourself with how your preferred trading vehicle or "indicator" index tends to behave with respect to those averages. I use the ones I do because I have familiarized myself with them through many years of watching them.

The setup I use may look strange at first, but it's as simple as a channeling system based on moving averages, with several different channels. Take what helps you: discard the rest.

Today's SPX chart will indeed appear messy because I'm going to include snapped Fibonacci brackets with my Keltner channels. I want to illustrate a point that you can apply to the other charts, too.

Annotated Daily Chart of the SPX:

The SPX was one of the indices that last week lost support of the 9-ema on daily closes. It has now set up a pattern of descending beneath the turning lower 9-ema, being pushed toward the downside target. Today, it dipped into the target zone as depicted by the dip into the oval on the chart.

What happens next? That, of course, depends on how the SPX and other indices respond in the coming days to today's tests of downside targets. Let's get the dire case out of the way first so we can discuss happier possibilities. As you can see from the SPX chart, if the SPX should drop and close consistent days below the channel line now just below 1330, it sets a potential downside target now near 1230. Would I suggest preparing for that to happen? Such an event seems impossible. However, I've seen many seemingly impossible Keltner targets hit. If those conditions are met, I will consider such a drop a possibility, a vulnerability, but I certainly wouldn't count on it happening.

Complicating the difficulties presented by that huge gap between one Keltner potential support level and the next is the fact that the SPX zoomed upward so fast between those levels. The SPX didn't pause to hammer out potential handholds and footholds in case prices start sliding backwards. What I would personally do is snap a Fibonacci bracket on the chart, as most charting programs allow you to do. Anchor it at the November 2011 low and the April 2012 high and hope that if the SPX continues lower, support kicks in at key Fibonacci levels. I've illustrated by snapping such a Fib bracket on the SPX's chart, but I won't do so on the others.

For the SPX, those next potential lower Fibonacci levels would currently be at about 1321-1322, about 1290-1291 and then about 1259. I've written "about" because I snapped the Fib chart to the lows and highs rather than calculating them exactly.

It doesn't matter what you think about the flower-petal and other theories behind Fibonacci brackets. We know those levels are watched. We know that people tend to buy at key Fibonacci levels after a descent and sell after a climb. Whether they're actually important levels dictated by the natural world or just self-fulfilling prophecies doesn't matter. They're watched. They're not guaranteed to hold, particularly if the SPX should barrel through them, but if others are watching them, we can be, too.

What happens if today's testing of the next downside target zone was enough of a test and the SPX rises from here? Keltner, Fibonacci and historical resistance all converge from about 1360-1363. Above that, resistance again converges from about 1375-1386. I would consider the possibility that gains could stall at one of those two zones and perhaps roll over. That would be true unless the SPX just blazes through them or meanders up more slowly and produces consistent daily closes above them. If I had short-term bullish gains, I would know ahead of time how I would treat any test of those two zones.

The Dow also dropped into a potential target zone, analogous to the one the SPX tested today. I will not be including the snapped Fib brackets on the other charts because they complicate the charts too much, but I will talk about the various levels.

Annotated Daily Chart of the Dow:

Let's again look at the most dire case first. If the Dow produces consistent daily closes below about 12600-12607, it sets a potential downside target near 11743. While I never ignore a potential Keltner target, I do look for other potential support levels, and I often do that by looking at those Fib levels that I snap on my charts. The bracket shows potential intervening support levels at about 12542, 12293 and 12044.

What if the Dow does steady at the potential target zone tested today and bounces from there? Keltner and historical resistance can be found from about 12909-13002, and then again near 13103-13105. I would certainly consider the possibility that gains could stall at one of those two zones and roll over unless the Dow just blazes upward through them or meanders up and then forms consistent daily closes above them.

Unlike the SPX and the Dow, the NDX did not drop all the way into its target zone analogous to those the SPX and Dow tested today.

Annotated Daily Chart of the NDX:

Instead, the NDX seemed to find support near historical support just under 2600. Until and unless the NDX can sustain daily closes above its 9-ema, now just under 2636, I would keep open the possibility that the lower target will still be tested.

What if it is tested and the NDX loses that support on daily closes? Keltner targets set a potential downside target near 2322. The price action between the nearest target near 2560 and that one doesn't provide those handholds and footholds to help us estimate where the NDX might stabilize between those two levels. That's one of the reasons these rabid climbs are so dangerous.

As I would with the other indices in the case of support being lost, I would snap a Fibonacci bracket, anchoring at the November low and this year's high to help determine where next targets and support might lie. Key levels below the current price are now at about 2548-2549, 2472-2473, and 2397-2398.

What if the NDX stabilizes, perhaps if the Facebook IPO engenders euphoria over anything tech-related? What if the NDX zooms higher? Potential resistance converges near 2636-2640. Watch for potential rollovers there and again at 2666-2668 and 2691-2695. If the NDX can sustain levels above that highest one, it's free to retest May's high.

The RUT also managed to keep its toes out of the next-lower-target's waters.

Annotated Daily Chart of the RUT:

What was special about the level at which the RUT steadied today? It steadied at one of those Fibonacci levels.

Let's look at the dire case first here, too. If the RUT should drop to and through the RUT's 769 potential target, also its potential support on daily closes, it sets a Keltner potential downside target at just above 701. What might be some interim levels in which it might find support instead? A snapped Fibonacci bracket suggests about 757-758, 735-736 and 704-705 as potential support levels on daily closes.

What if the RUT steadies at today's low or that lower nearby target and climbs? Serious-looking potential resistance on daily closes converges near 793-795, so I would be aware of rollover potential there, if that is tested. Of course, light historical and round-number potential resistance exists at 800, and the Keltner levels would extend that up to about 809-810. If the RUT manages to surpass all that on sustained daily closes, it's free to test the early May high.

With everything going on in Europe, our currency certainly seems more stable when compared to others. Over the last week, the dollar has broken upward out of a consolidation zone and charged higher. In many cases, commodities priced in the dollar have dropped sharply lower as a result. Of course, more is at play than simply the pricing of the dollar against other currencies, with factors such as geopolitical developments, especially in China, recession in Europe and others impacting the cost of commodities. Still, in the absence of inflation, the movement of currencies against each other can be a primary factory. Many who have jumped on gold as a hedge for equity trades may be finding that, at least for the moment, both equities and gold turned lower at the same time. These relationships can shift and then shift back in unexpected ways.

Annotated Daily Chart of the Dollar:

Tomorrow's Economic and Earnings Releases

In an effort to shorten the discussion and present this information in a more accessible manner, I'm including a chart with the most important releases marked in red.

What about Tomorrow?

What I hoped to see when I looked at intraday charts this evening is some evidence that the decline has finished. Instead, I found at least one bit of evidence that might indicate otherwise. It's visible on the SPX's chart, a sideways consolidation that sometimes occurs about midway through a move. If that's what it is, that sideways consolidation from last week may indicate more downside to come. I think we should at least allow for the possibility even if this chart doesn't definitively predict it.

Annotated 30-Minute Chart of the SPX:

This morning, the SPX rose from the descending-lower Keltner support level and tested resistance this afternoon, but fell back again to close near the day's low. If prices break through those lows tomorrow and continue through the target shown on the daily chart, I would then look to the discussion on the daily chart for next targets.

Let's talk about the possibility that any early decline tomorrow is quickly reversed or that we wake up to bouncing futures tomorrow. If one were to draw a trendline across last Wednesday's and Friday's lows, that trendline would now cross somewhere near 1355-1360, depending on when the SPX should rise high enough to test it. Prices that rose that high would be testing converging Keltner resistance at the same time. Sustained 60-minute closes above about 1360 would set up a potential nearby Keltner target at 1371-1376. That action would lessen the likelihood that the formation is of the type that forms about halfway through a move although it doesn't entirely undo that possibility. For now, I think we must consider prices vulnerable to a rollover and further drop.

The same setup is visible on the Dow's 60-minute chart.

Annotated 30-Minute Chart of the Dow:

The congestion zone here is triangle shaped, as it was with the SPX. If the lower trendline were drawn in, it would roughly coincide with the potential resistance shown at the upper orange oval, near 12830-12865. If the Dow rises tomorrow, watch whether the Dow finds resistance on 60-minute closes at that level, indicating that weakness remains. If instead, the Dow's prices can scale that first zone and maintain 60-minute closes above it, that action would indicate that the Dow is more likely to rise up and test the next target marked on the chart, where next resistance might also lie.

If the Dow continues lower tomorrow morning and doesn't soon bounce, watch the daily chart for likely support levels and next targets.

Whoever was moving the markets today was moving them rather homogenously, perhaps indicating some big money involvement, since so many of the intraday charts look similar. The NDX has the same congestion zone setup as the others.

Annotated 30-Minute Chart of the NDX:

The same explanations fit here: a congestion zone of the type that sometimes forms halfway through a move, the triangle's lower trendline now coinciding with marked Keltner potential targets and resistance. If the RUT continues lower tomorrow morning and isn't quickly reversed, looked to the daily charts for next potential support and targets. The areas to watch for potential nearby resistance on daily closes are marked on this chart.

The analogy holds for the RUT, too, with some minor differences.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's potential support has flattened beneath it, perhaps looking a little stronger than on some other charts where it slants sharply lower. Appearances can be deceiving on the RUT, however, as this index's prices can often slice through support and resistance as traders pack into or out of the small caps. If the RUT should bounce, however, I would be watchful of potential resistance on 60-minute closes near 788-791, with next potential resistance marked, too. If the RUT drops lower, some nearby potential support on 60-minute closes exists and is marked by the ovals beneath the current price. If these fail to provide support and the RUT doesn't soon bounce, turn to the daily chart for other potential support and target levels.

What do I think? When I look at the intraday charts, I see the possibility that there's more downside to come. This fits with the observation that some indices have not yet hit their projected downside targets on their daily charts, and others have dipped into them but not hit the lower edge of their analogous support areas. When I take that all together, I am not certain that the downdraft is done.

However, we must factor in the possibility that, even if further downside is possible, markets as susceptible as these to geopolitical developments can bounce at any time. Headlines this afternoon announced that the Dow had been down eight days out of nine. Charts suggest that there's more downside and maybe a desperate get-me-out type of decline ahead of us. However much we like to think that all knowledge is already factored into the charts, can we really know this evening if Greece's many factions will arrive at some kind of miraculous understanding overnight that will avert a new election and guarantee a new infusion of cash? Can we know if China will announce more openly that it's amassing gold and will eschew a fiat currency for one tied to gold. I don't think so. We can look at vulnerabilities, both downside and upside, and think about how our trades would perform in case they were approached.

If markets bounce, I would put the 9-ema or, if you prefer, the 10-sma or 10-ema on both intraday and daily charts. Watch how the various indices or your preferred underlyings behave at the close of the period being watched in response to tests of those averages. If markets drop heavily, I suggest employing a snapped Fibonacci bracket to watch for potential support, as mentioned earlier. Don't count on that support to hold but do consider ratcheting stops closer as those levels are approached.