Market Internals


Many global bourses struggled in overnight trading. In Asia, the Nikkei 225 fell 1.71 percent; the Hang Seng, 2.01 percent; and the Straits Times, 1.70 percent. As the sun was rising along the East Coast, the DAX was down another 1.12 percent. The CAC 40 was bucking the trend, up 0.57 percent. Markets were closed in the U.K., with a bank holiday scheduled.

Although many headlines attributed overnight weakness to the U.S.'s weak non-farms payrolls on Friday, news from Europe contributed. The eurozone's PPI disappointed this morning. In this weekend's Wrap, Jim Brown mentioned that you can hardly go a day without another eurozone debt downgrade. That apparently includes weekend days, too. On Saturday came the news that Moody's was downgrading Greece again due to heightened fears the country would exit the eurozone.

Other news might have proved more hopeful. A new day appeared to be dawning, and the sunnier outlook was soon to be reflected in European bourses and our futures. All turned higher for a while.

A Reuters article pointed to increasing talk about a "fiscal union" in the eurozone, with initial proposals to be presented in a summit to be held June 28-28. That fiscal union would include a central authority to deal with eurozone finances. It would go further, giving increased powers to the European Court of Justice, the European Parliament and the European Commission. Germany has vowed not to consider joint euro bonds or cross-border deposit guarantees unless such broader eurozone management is in place. Despite those strong words, some have characterized Germany's stance as softening. Spain's prime minister has reportedly indicated acceptance of the need for a eurozone fiscal authority, but there would be more news from Spain later in the day.

Other market watchers point to the immense antipathy some eurozone citizens might have to such measures. Politicians might have even more difficulty taking a supportive stance. For now, the news emphasized that movement toward some kind of resolution was being made and made more quickly than anticipated. Perhaps traders ought not to have counted on continued sunny weather, however cheering this morning's early sunshine might have been. We had a potentially market-moving release ahead of us, and more news was going to hit near the close.

Meanwhile, Portugal has apparently met the conditions needed to receive its next tranche of bailout money from the ECB and IMF, according to another Reuters article, "Portugal passes fourth EU-IMF bailout review." In the same Reuters article, Portugal's finance ministry was characterized as saying that three of the country's banks would be receiving more than 6.65bn euros to improve their liquidity. By the end of the day, three Portuguese banks, characterized as "leading" banks had stepped up to say that would draw from those funds.

As our open approached, the CAC 40 continued climbing, the DAX cut some of its losses and our futures scrambled higher.

Monday's Developments

Shortly after the open, a black cloud blew across the skies, blotting out that early sunshine and presaging other dark clouds to come. The economic calendar had looked light today. Factory orders were reported at 10:00 am ET, and they heralded storms. The prior number had been a revised-lower -1.9 percent, but expectations were that this one would rebound into positive territory, to 0.3 percent. Instead, the orders dropped, turning in a -0.6 percent headline number, the steepest decline in two years. Orders for nondefense aircraft had rebounded from the previous steep decline. If transportation had been stripped out, the overall number's decline would have been 1.1 percent.

Inventories increased to the "highest level since the series was first published," the Census Bureau said. New orders declined, worrying some that the GDP expectations will be revised lower. Orders for manufactured durable goods such as washing machines fell 3.7 percent in March while inventories of durable goods increased. Non-durable items such as food rose 0.5 percent. Those who would like to peruse today's release in more detail can find the report on the Census Bureau's site here.

The report pushed indices lower again, erasing the early morning gains. Before the damage ended, the Dow and RUT had dropped below last year's closes, if my charts are correct, turning negative on the year. In Europe, the DAX and CAC 40 rolled over. The DAX ended lower by 1.19 percent. The CAC 40 barely managed a positive close, up 0.14 percent, a mere 4.02 points.

At their lows of the day, many indices were hitting the bottoms of regression channels in which they have been moving lower. Long-time traders know that this is the time for markets to either bounce or drill through the bottom of those channels. Bounce they did, but the bounces proved tepid so far.

Midday, Olli Rehn, European commissioner for economic and monetary affairs, breathed more life into the image of some sort of banking union in the Eurozone. He had met with the French Finance Minister. The two emerged with the thought that the European Commission should perhaps consider direct injections into struggling banks via the eurozone's permanent rescue fund. They posited this direction as potentially viable since "we are now moving on in the discussion on the possible ways and means to create a banking union," Rehn is quoted as saying in Reuters and Marketwatch stories. Such a change in methodology would require a change in the charter of the European Stability Mechanism.

More was to come on that subject, with different ideas bandied about. Later in the day, market watchers were to learn that the G7 was holding emergency eurozone talks, announced by White House press secretary Jay Carney and reported in a Reuters article (Allison Martell and Andreas Rinke). The authors said that rising concern about a potential Spanish banking crisis prompted the emergency talks. Fears of a bank run in Spain have heightened. Canada's Finance Minister said that pressure would be applied on Europeans to act during a conference call to take place tomorrow. The U.S. appears unlikely to agree to IMF money being used to support the eurozone, at least temporarily squelching hope of a concerted effort by all G7 members. Germany's Merkel attempted to calm stormy winds, saying, "All the instruments are available to guarantee the safety of banks in the eurozone." Spain is due to test the markets with 10-year bonds on Thursday, but there are many trading hours between now and Thursday.

Story stocks included Chesapeake Energy (CHK, 16.52, up 0.94 or 6.03 percent) in another chapter of the Carl Icahn story. After consultation with Icahn, his affiliated entities and Southeastern Asset Management, the company has announced a reshuffling of its board. After hours, CHK dropped a nickel off the closing price.

In the pharma space, Auxilium Pharma (AUXL, 21.91, up 3.06 or 16.23 percent) announced positive results from its phase III studies of XIAFLEX, studying improvements in Peyronie's Disease and penile curvature deformity. The company anticipates that this drug will become the first approved biologic treatment for Peyronie's Disease.

Yelp (YELP, 15.22, down 0.47 or 3.00 percent) and Groupon (GRPN, 8.95, down 0.74 or 7.64 percent) temporarily fell below important levels. Intraday, YELP dropped below its initial IPO price of $15.00, and Groupon, low enough that the market cap fell below the reported $6 billion amount Google offered back in 2010. YELP managed to climb back above that initial IPO price by the end of the day.

Electronic Arts (EA, 13.07, down 0.05 or 0.38 percent) appeared on the list of story stocks. The company was to hold a press conference after the market close, at a video game conference in Los Angeles. After hours, the stock had dropped six more cents as this report was prepared. The company announced that it would produce UFC videogames.

Dollar General (DG, 48.49, down 0.13 or 0.27 percent) was due to report earnings after the close today. After that report, it dropped another $1.61 or 3.07 percent to trade at $47.00 as this report was prepared. Although its earnings were characterized as "solid" in the WSJ and the chairman and CEO raised the full-year outlook, the full-year estimate appeared to be a little lower than the highest average over the past three months.

Let's look at charts.


Annotated Daily Chart of the SPX:

As I've been doing in recent Wraps, I've included a Fibonacci bracket in the SPX's chart. It makes the chart even noisier than it would otherwise be. I'm not including it on other charts, but I will make references to key support or resistance levels based on Fib evidence if they're important. For example, I've marked the 50 percent retracement of the rally off last October's low into this year's high with a red oval. Some market participants will be watching that level, as it's sometimes a level at which buyers step back in. I'm not suggesting that our readers do so with anything other than lottery money if they're so inclined. My charts show a much lower potential downside target, so I won't be doing any nibbling. However, I am suggesting that you protect bearish profits if that level is hit. I'll be marking other charts at that level, with the ovals sometimes seemingly sitting in the middle of nowhere.

The SPX hit the bottom of a regression channel in which it has been descending, and even pierced the support intraday. Anyone with this charting program can snap such a regression channel, so it made a handy place to try to catch a ride to the upside. That may be all that was happening when the SPX steadied. Be wary of any support levels holding until we've had a true capitulation day or until we've expended much more time shaking out weak hands. I just don't believe we've had a true get-me-out-at-any-price capitulation day yet and neither have we had enough time to shake out all weak hands. I'm not avoiding trading, but I am being careful about my delta and vega risks.

At the moment, I believe there's as much risk of the SPX falling to 1,248-1,250 or perhaps even 1,225-1,228 as there is it rising to 1,290-1,293 or even 1304-1312. And vice versa. There's much risk of us waking up one morning to a coordinated announcement by central banks across the globe, one that will blow up short positions and create a monster relief rally. However, I'll remain suspicious of its staying power if that happens. The SPX would have to break upward out of the regression channel in which its been descending, wherever that upper resistance might be located at the time, and would have to maintain that former resistance as support on pullbacks before I would believe the decline is finished and all is A-okay.

According to the Keltner channeling system I use, the SPX has set a potential downside target at the lower red oval, so I'll be guarding against that possibility in my trades, too. We know that the markets have been declining a while, but the strongest downdrafts can come out of such conditions, so remain wary. I'm not predicting a decline to that level, but I am suggesting you be able to protect your trades to that level, if it should be hit. "Protect" doesn't necessarily mean make money. It means not losing more than you can afford to lose.

If the SPX should bounce, I would watch for potentially strong resistance on daily closes at 1,290-1,293 and again at 1,304-1,312. You can see the confluence of Fib, Keltner, round-number and historical potential resistance at those levels. While I am always reassured about the validity of potential support and resistance when several types converge in this way, I can't emphasize enough that some concerted central bank action could temporarily blow through each and every one of these. We are in times when I almost feel sheepish about pointing out any "potential" support or resistance.

The Dow did not hit the bottom of its think-or-swim-drawn regression channel. As happened with the SPX, the bottom of that channel coincides with important FIB potential support, the 50 percent retracement of the rally from last October's low into this year's high.

Annotated Daily Chart of the Dow:

Other than the fact that the Dow did not hit the bottom of its channel, the Dow's pattern is much like the SPX's. The Dow, however, went negative for the year. There is of course potential support at the bottom of that channel. The Dow also has a potential Keltner downside target in place that's below the bottom of that regression channel, at about 11,725-11,735. Traders should be able to defend their trades to that level.

Traders should also be able to defend their trades against a rabid rally that carries the Dow up to 12,260-13,000 or even 12,360-12,400. Each of those represents zones where various forms of potential resistance on daily closes converges. I would have to see the Dow produce consistent daily closes above about 12,725 before I would trust too much in any rally. But, before that level can be tested, the Dow has to shatter several other firm levels of resistance. A concerted announcement by central banks could provide the explosive power to break through some of the closes levels of resistance, but the blast higher might not last. Do not ignore adjustments that should be made because you believe that the markets "have to" turn around, but be wary of sustainability.

The NDX's 50-percent retracement level also coincides with the bottom of its regression channel. Like the Dow, the NDX did not quite hit the bottom of that channel. Like the Dow and the SPX, it still has a much lower potential downside target in effect.

Annotated Daily Chart of the NDX:

The Keltner channeling system I use has set a potential downside target near 2,310-2,315 for the NDX, a potential target that would stay in effect until the NDX has managed to maintain daily closes above 2,500-2,515. I still would be watching for rollover potential until and unless the NDX could break out of the descending regression channel and sustain daily closes above it on any pullbacks. Until then, watch for rollover potential at 2,500-2,515, 2,560-2,575 and then at 2,590-2,600. If I were trading the NDX, I would want to know that I could defend my trade on a drop to at least 2,400 and probably to 2,300--with "defend" again meaning not lose too much while I adjusted and/or exited--or on a bounce to 2,560 or maybe even 2,600.

The RUT did go negative for the year. It closely approached the support of its descending regression channel. It has a little way to go before it hit the 50-percent retracement of the rally off the October low into this year's high.

Annotated Daily Chart of the RUT:

Around 723-725, the RUT hits a 50-percent retracement of its climb from last November's low into this year's high, so I wouldn't be surprised to see some bulls step in if the RUT should hit that level. As noted earlier, I wouldn't suggest it to our readers with anything other than lottery money, and I'm not going to be joining in on that spending of the lottery money. My Keltner system suggests a downside target near 700 with potential support from the December swing lows as high as 706. I want to be able to defend my RUT trades down to that level.

As with the other indices, we could have an upside rabid-short-covering-rally to protect against or profit from, too. I would be prepared to defend my RUT trade up to about 753-757, where Fib, Keltner and regression channel potential resistance on daily closes all converge. Watch for rollover potential at that level, if it's reached. However, since this is the RUT we're talking about and we know how the RUT can overrun boundaries, we need to look at the next potential upside target, too, in a zone beginning at about 775 and extending up to about 785. Several forms of potential resistance converge there, too, and rollover potential could be strong if that level is tested.

The dollar pulled back, but the dollar-denominated commodities didn't exactly act in lock-step opposition. Silver pulled back, too, instead of gaining, gold produced a small-bodied doji, while crude did bounce.

Annotated Daily Chart of the Dollar:

The dollar did pull back, but it has so far maintained the support of its 9-ema, the red moving average from which it has been bouncing in its long climb since early May. Sustained closes beneath that moving average, and particularly back below the January peak high of 81.725, might change the perspective. For now, this has so far just been a normal pullback like that one since in the middle of May.

Tomorrow's Economic and Earnings Releases

In addition to the already scheduled events for tomorrow, we must of course add that emergency G7 meeting over Spain.

With our Beige Book and an ECB meeting both scheduled for Wednesday and this emergency G7 conference call tomorrow, market participants may be paying particular attention to the Federal Reserve presidents speaking tomorrow, so I've included all the speakers I could find. Dallas Fed President Richard Fisher will be addressing the limits of the powers of central banks, of particular interest in this climate. I could not find information as to whether there will be a Q&A session, however, and it's usually those Q&A sessions that produce the most market-moving statements.

What about Tomorrow?

It almost feels dishonest to look at intraday charts today. The big moves have scrambled these intraday charts. The extended downdraft has blown through downside targets all the way through the 60-minute charts that I'm showing, so new potential downside targets require daily charts. However, let's look at what happens if markets bounce tomorrow morning, with the caveat that a relief rally can blow through these levels to the upside, too.

Annotated 60-Minute Chart of the SPX:

The SPX bounced off its low and headed up into resistance. It stopped at the first level of potential resistance on 60-minute closes. The bounce didn't prove anything. The SPX could as easily roll down from this resistance test as it could bounce up. If the SPX should bounce tomorrow morning, bulls would want to see consistent 60-minute closes back above the 9-ema, the red moving average on this chart. Those consistent closes above that level would then set a potential upside target back near 1,297, although that line may by then have been pushed higher. If that is breached on consistent 60-minute closes, the next target is near 1,310-1,315.

If the SPX rolls down, those who want to see the SPX steady would want to see it hold up near today's low. Prices that break that low and don't soon bounce set up the potential for a downdraft.

The Dow's 60-minute chart is similar.

Annotated 60-Minute Chart of the Dow:

Like the SPX, the Dow stopped at first bunched resistance. We can't tell anything about that other than it tested resistance. It could as easily roll down as it could climb. The next potential upside targets and potential resistance levels on 60-minute closes are marked on the chart at the ovals. The caveat has to be that these resistance levels will mean nothing if some concerted announcement is made. If the Dow rolls down and pushes below today's low and doesn't quickly reverse, the potential is that those downside targets on the daily chart will be approached.

The NDX's chart looks different.

Annotated 60-Minute Chart of the NDX:

The NDX did push above that first level of grouped resistance. If it holds above those levels on consistent 60-minute closes after the open tomorrow, it has set a potential upside target in the 2,490-2,500 zone. Obviously, Keltner, round-number and historical potential resistance all come into play in that zone, so it should be watched for rollover potential. If the NDX can push through that level and maintain it on consistent 60-minute closes, the next potential upside target is marked at about 2,620, although that channel line would likely be higher if the NDX had pushed hard to the upside.

If the NDX instead declines tomorrow morning back below that former resistance, today's rally is suspect. The first potential support would be at today's low, but if that failed for more than a few minutes, traders should look to the daily chart for next potential targets.

The RUT is usually leading the way to the upside or downside, and it might be a little concerning that it did not do so today. It behaved like the more sedate SPX and Dow. It found resistance at the first place where resistance would be suspected.

Annotated 30-Minute Chart of the Russell 2000:

As with the SPX and Dow, we don't know anything by this close except that resistance was tested. On sustained 60-minute closes above it tomorrow, a target near 742 and then 749-752 is set. Keltner, historical and round-number resistance might be expected in that zone, so it should be watched for rollover potential. The next potential upside target is also marked, if the RUT should sustain levels above that zone on 60-minute closes. If the RUT should instead roll over first thing tomorrow morning, watch for potential support at the day's low. If that is lost and not quickly regained, look to the daily chart for next potential support levels and targets.

To sum up, most index daily charts show lower candle shadows as prices sprang off their day's lows. The BIX and BKX, financials, didn't look quite as springy as some other indices, a worrisome sign. Still, many indices produced small-bodied candles or doji at the bottom of a decline. Normally, this signals that, at the least, we might see a pause in the decline tomorrow, and that a bounce up to test resistance might be the most likely next move. A concerted move by central banks across the globe could be the spark that explodes prices higher again, and we know now that they're having a conference call.

However, we don't know the results of that call, and we do know it was an emergency meeting precipitated by heightened concerns. I would like to suspend talk about "most likely" in the current conditions. Capitulation days come out of conditions like these, too. I can talk all day about what the norm might be, but markets feel risky right now, and all subscribers should be aware that these are not normal times. The outcome of that meeting might be fizzle like a firecracker that fails to explode, and markets might tread water for a few days until the next direction is determined. It could be news that a workable solution has been found and the assurance that all global financial institutions will pull together to make sure it works. We could instead wake to the news that there had been runs on Spanish banks.

I am not prescient and neither are you, but you do have the tools to hedge risk: options. In this environment, use them to hedge against risk rather than to take on too much risk. These are the kinds of market conditions during which I and other writers begin hearing from subscribers who had scale into too big a trade to handle, and I want all our subscribers to calmly weather this period of time.