Market Internals


The moon was rising over the U.S. when overseas markets and our futures opened last night. We finally could determine how markets would interpret the weekend's developments in China, Europe and Iran. Thanks to Jim Brown's excellent summation, we knew what those developments were, but how would markets interpret them?

Friday afternoon's parking of prices right under resistance hinted that, given the right combination of developments, an attempt would be made to gap our index prices beyond resistance this morning. Futures indicated that would be exactly what would happen. However, all night, a bad moon was rising, its light far from conducive to happy trading. That moon came in the form of rising yields on 10-year Spanish bonds, hinting that all was not resolved in the world of Spain's banks. About the time our cash markets opened, those yields had risen from 6.023 to 6.424, having pulled back from an early morning high of 6.457. They were to go higher still by the end of the day.

Some market watchers questioned whether the weekend's events could stop capital flight from Spanish banks or open interbank markets in the Europe. They noted that sunrises and moonrises move us inexorably closer to next weekend's election in Greece. Destabilization in Greece could lead to destabilization elsewhere, notably in Spain. Articles about contingency plans in case of an orderly or disorderly Greek exit began starring on financial websites.

European bourses had gapped higher, but they moved off their highs, something that hadn't happened in Asian trading. Sunday night, Asian bourses gapped higher and traded in tight ranges near the day's highs right into the close. The Nikkei 225 gained 1.96 percent; the Hang Seng, 2.44 percent; and the Straits Times, 1.82 percent.

In our pre-market hours, the OECD released its composite leading indicator (CLI) for China and India, and one wonders whether that report would have impacted trading in Asian countries if released while Asian bourses remained open. It may have had an impact on the Sensex, which tumbled all the way into negative territory before its close.

Both previously roaring economies saw their CLI's drop further below their 100 averages. China's fell to 99.1 from April's 99.4, and India's fell to 98.0 from April's 98.2. Standard & Poor's reported that political roadblocks and slowing GDP growth in India could result in that country being the first of the BRIC countries to have its ratings cut below investment grade.

Better news came from the overall number for the 33 countries covered. That rose from 100.5 from April's 100.4. Russia, Japan and the U.S. helped push that overall number higher. The euro zone steadied at 99.6, but that is below its average.

Monday's Developments

By the time those developments had been noted, it was time for moonlight to give way to sunlight here in the U.S. In the bright daylight, some market participants questioned whether the EUR100b set aside for the recapitalization of the Spanish banks would be enough. The market still hadn't seen the results of a private audit of Spanish banks. The Spanish 10-year yield kept rising, climbing all the way to 6.508 from its overnight low of 6.017.

Our bourses gapped higher, although not as high as the Sunday night futures led some startled U.S. market participates to anticipate or fear, depending on their positions. Most indices immediately began trending down from the open, most closing their gaps within the first thirty minutes. Some U.S. indices then steadied for a number of hours; some didn't.

The FTSE 100, DAX and CAC 40 all dropped into negative territory, although the DAX managed to scramble up at the last moment and close higher by 0.17 percent. The FTSE 100 closed lower by 0.05 percent, and the CAC 40, by 0.29 percent.

Shortly after their close, Reuters reporter Luke Baker was discussing "capital controls" floated by EU officials as they brainstormed scenarios related to a Greek exit of the euro. The measures being discussed as part of contingent plans sounded like the kind of plan county officials would make in case a wildfire swept through a county and burned 1700 homes before it could be stopped. That's not likely to happen, except it did in our community last September. However likely or unlikely a Greek exit might be, hearing about contingent plans that included limiting the size of ATM withdrawals and instituting border checks did not engender happy feelings. EU officials emphasize that this is just sensible planning. Such planning does not increase the chance of such a scenario unfolding, they insist.

Number one among the story stocks because it tends to lead so many indices by the nose was AAPL (571.17, -9.15 or 1.58 percent). Today at its developers' conference, the company announced that its new MacBook Pro will sport a 15-inch screen with resolution set at four times that of previous models. It will employ the Retina display that AAPL already uses for its latest iPads and iPhones. However, rather than making the Retina display standard on the new MacBook Pro, as it is on some of those other AAPL products, the MacBook Pro with Retina display will come at a $400 premium to the MacBook Pro without the Retina screen. The company also said it will sell Mountain Lion, the new version of its operating system, for $20, beginning next month. This system will enable dictation on Macs, along with other developments.

AAPL has been trading in a narrowing rising wedge on its daily chart, with wedge support and resistance currently at about 561 and 591, respectively. AAPL had been holding near the gap high today until the conference results began leaking out, and then it dove hard, playing catch up.

Story stocks also included FSLR (12.33, -0.47 or 3.67 percent) and IMI (6.76, +0.33 or 5.13 percent), with the companies unveiling a joint program to address the conversion efficiency of First Solar's CdTe solar cells. With supply of competing c-Si outstripping demand in recent months and prices dropping, PV cells no longer had the cost advantage they once did.

China Unicom (CHU, 13.98, +0.43 or 3.17 percent) announced an agreement, pursuant to regulatory approval, to acquire approximately 4.56 percent of the issued share capital of Telefonica International (TEF, 12.01, -0.25 or 2.04 percent) at a price of HK$10.21 per share. CHU already holds about 71.97 percent of the issued share capital of TEF. TEF's chairman Alierta Izuel will remain as a Director of the Company after the acquisition.

TXN (27.65, - 0.87 or 3.05 percent) also appears in any list of story stocks for the day due to its after-the-close Q2 update. The company said revenue would range from $3.28-3.42 billion. While that's a tighter range than previously provided, the midpoint remained the same. Earnings are now expected to range from $0.32-0.36. Again the range is tighter, but the midpoint is the same as its previous projection. The stock was steady in after-hours trading as this report was prepared.

As Jim discussed this weekend, additional causes for jittery markets include Thursday's looming OPEX meeting. The Supreme Court could make an announcement on the Affordable Care Act at any moment. We don't know when the results of the private audit of Spanish banks might be announced.

Let's look at charts.


Last week's price action clarified our determinations of meaningful breakout levels. Regression channels are channel generated automatically by a charting program using regression analysis rather than by drawing trendlines at high points and low points. I've been displaying the latest descending versions, on the index charts. Indices bounced off the lower support last week and then tested or exceeded upper resistance this morning.

We can consider the markets in a downtrend delineated by those channels. For a rally to be anything more than a climb through that descending channel, breakouts must be sustained on daily closes. They must clear the descending regression channel's top line and also Keltner channel levels I'll indicate, all on sustained daily closes.

This morning, the SPX gapped up to test the resistance grouped at the top of that descending channel.

Annotated Daily Chart of the SPX:

The channel's resistance was joined, as can be seen on the chart, by historical, Fibonacci and Keltner resistance. The Keltner resistance is in the form of the 120-ema, the green moving average visible on the chart.

Those with net long positions would prefer, of course, that the SPX not roll over and travel all the way down through that descending channel again. When the SPX stabilizes or gathers strength, it usually produces closes at or above a flattening or rising 9-ema, the red moving average in the chart. That's what those with net long positions would like to see happen this time if the SPX continues to pull back. The SPX landed right on that moving average at the close.

If that support doesn't hold on daily closes, 1300 and then 1284-1290 are next potential targets and also next levels of potential support. Below that, a drop into the bottom of the channel or maybe all the way toward 1249 are next levels to watch for potential support.

Technical analysis doesn't govern what happens with markets or whether they move to the upside or the downside. In an emotionally charged environment like this one, it's foolish to predict whether upside or downside targets will be hit. Rather, it's important to look at what could happen if prices move either direction. What's the vulnerability to the trader?

Let's then look at the more bullish view. If the SPX does sustain daily closes above the top of that descending regression channel, 1360-1365 and 1390-1395 are next potential targets. They might also be strong resistance levels on daily closes.

The Dow's chart proves a little different than the SPX's. Its difference casts a murky light onto the whole thesis that the descending regression channels are important. The action does, however, reiterate the reason that I'm also requiring that Keltner channel resistance be surmounted before I believe too strongly in an upside breakout, particularly on a narrow index like the Dow 30.

Annotated Daily Chart of the Dow:

Unlike on the Dow's chart seen above, the (peach) 45-ema and (green) 120-ema that I use on this nested Keltner channel setup converge with the top of the SPX's descending regression channel. On the Dow, they converge above the regression channel, as can be seen on the Dow's chart. The Dow gapped above the top of that channel but was repulsed by those averages and other, more conventionally watched ones also converging there.

The Dow tumbled all the way back to the top of that descending regression channel. Have I just aimed the cursor wrong and so created a different channel than on other charts or did the narrow breadth of the Dow allow it to get pushed out of that channel a bit more easily? In either case, the close at the top of that channel and beneath the Keltner resistance questions the sustainability of the breakout from late last week.

As with the SPX, if the Dow is truly strengthening, it will find support on daily closes at a flattening or rising 9-ema, the red moving average now converging with the top of that descending regression channel. Those hoping for a sustained upside breakout want to see that support hold on daily closes. They want the Dow to then rise to challenge that moving average resistance that it tested this morning again, this time breaking upward with sustained closes above that gathered resistance. I would extend that resistance up to about 12705. If the Dow can surmount that resistance, the Keltner channel system sets a next target just above round-number support/resistance near 13100, with the target marked with a green oval.

If the Dow can't sustain daily closes above the top of its descending regression channel and converging 9-ema, then the first red oval marks the next potential downside target and support zone to be watched. That will constitute a retest of last week's low. Below that, the next potential target is marked in case the Dow might exceed that low for more than an hour or two.

Like the Dow, the NDX gapped out of its descending regression channel at the open, rising toward the 45-ema and falling back. It had soon fallen to test the top of the descending channel, where other potential support had gathered. By the middle of the afternoon, it was falling back into that channel and toward a 9-ema test.

Annotated Daily Chart of the NDX:

The NDX overran that 9-ema at the close, but the breakdown wasn't large and of course hasn't been sustained through several days, so it's not yet a trustworthy break. We have to allow for the possibility that the support may yet hold, although that daily candle is admittedly an ugly one and a tumble toward the next downside target seems a strong possibility.

As is true with the other indices, the NDX would need to sustain daily closes above the top of its descending regression channel and the converging (peach) 45- and (green) 120-ema's before we should consider the index breaking out of its downtrend. If that should occur this week with the NDX, the Keltner system sets up a potential upside target above 2700, marked on the chart. However, I would be aware of gaps in the 2680-2700 zone, with gap resistance perhaps able to cut short any climb toward the next target.

However, determining how far the indices would climb didn't turn out to be our primary concern today. Market participants needed to know how far it would fall. As is also true with the other indices, if the NDX is attempting to stabilize or climb, it tends to find support on daily closes on a flattening or rising (red) 9-ema. If it's too weak to do that, support might be found at the convergence of the midline of the regression channel and the next lower Keltner channel boundary, marked with the first red oval. Succeeding potential downside targets are marked, too, in case the NDX should test and fail through succeeding levels of targets and potential support on daily closes.

The RUT was our canary in a mine today. The RUT gapped up to test the top of its descending regression channel, but it didn't stay there long. When the SPX and other indices were stabilizing in the middle of the day, the RUT struggled more.

Annotated Daily Chart of the RUT:

As with other indices, the RUT would have to sustain daily closes above the descending regression channel and above the converging 45-ema and 120-ema, the peach and green-colored moving averages on the charts, before there's been a true change in tenor on the daily chart. I would add in the potential historical and Fibonacci resistance near 1340-1341 that needed to be cleared on daily closes. For now, the RUT is still in a downtrend, moving down inside that descending regression channel.

If the RUT is strengthening, then it would likely begin finding support on daily closes at or above a flattening or rising 9-ema, the red moving average on the chart. If that sign of stabilization couldn't be achieved, it would at least need to stay in the upper half of that descending regression channel. Otherwise, the RUT threatens to decline to test last week's low or the lower boundary of the descending regression channel. Today, the RUT closed below its 9-ema and at the midline of the descending channel. If it was just overrunning support, it needs to rise fairly quickly tomorrow and scramble back above that 9-ema. Otherwise, it risks falling toward 740.

If the RUT does break out of its descending regression channel and produce consistent daily closes above that and the moving averages I've pointed out, the Keltner channel system points to a new upside target above 1390, marked on the chart. However, we can also see historical support/resistance in the 1360 and 1380 levels, and so can other market participants. Those with profitable long positions would want to be guarded with profits if those levels were approached.

While indices were gapping higher and then rolling over, the dollar was doing the opposite. It opened low and charged higher today. It charges into potentially strong resistance, however. Note the way that it bounced off the rising red 9-ema through most of May. Now it needs sustained closes above that moving average to keep the average flattened while the dollar consolidates recent strength or above the average to turn it higher again. Otherwise, the dollar's ability to stay above the year's January 13 swing high of 82.045 might be questioned. Although the relationships change from time to time, equities and commodities often trade in opposition to the dollar.

Annotated Daily Chart of the Dollar:

Tomorrow's Economic and Earnings Releases

In addition to these events scheduled for tomorrow, two FOMC members, Cleveland Federal Reserve Bank President Sandra Pianalto and Chicago Federal Reserve Bank President Charles Evens, speak tonight. Only Evans' speech seems specifically tied to economic issues. He will be taking questions from the audience and media.

What about Tomorrow?

The SPX closed the day near Friday's swing low, where Keltner and Fibonacci potential support converge on the 30-minute chart.

Annotated 30-Minute Chart of the SPX:

Support on 30-minute closes could be found anywhere from today's close down to the 38.2 percent retracement of the week-long rally. Bears should be aware that support could kick in at any time.

Bulls tempted to nibble on new trades should also be wary, however. Any decline below Friday's swing low that isn't quickly reversed would constitute a confirmation of a double-top formation on this 30-minute chart and hint that the SPX had far more downside to go. The SPX barely managed a close above the confirmation level. Further drops make a 50 percent or even 61.8 percent retracement of the last week's rally seem more likely. The Keltner setup suggests that sustained 30-minute closes beneath about 1305 would set up a potential downside target near 1280-1282.

I wouldn't consider today's end-of-day rout to constitute "sustained 30-minute closes" beneath the confirmation level, but bulls really need to see a bounce fairly early tomorrow morning to lessen the threat that the SPX will fall down toward its double-top target. That target is found by subtracting Friday's swing low from today's high, and then subtracting that same number of points from Friday's low.

Under normal circumstances, any rally tomorrow morning would face likely firm resistance at the conjunction of Keltner and Fib resistance on 30-minute closes now at about 1315-1318. Above that, another grouping converges from about 1328-1330.

The Dow's setup is similar, except that the Dow's two tops are probably not close enough to constitute a double top.

Annotated 30-Minute Chart of the Dow:

Those who want the Dow to steady and climb still need to see it stop its descent soon, preferably above the 38.2 percent retracement of the week-long rally. The Keltner setup suggests that sustained 30-minute closes beneath today's would set up a next target at about 12356, but a lower open tomorrow would likely push that level closer to the 50 percent retracement of the week-long rally or at least a closer convergence of the two. If that 50-percent level doesn't hold as support on 30-minute closes, then the Keltner setup suggests a downside target of about 12150. However, I would certainly be aware of potential support near each of those Fib levels marked on the chart.

If the Dow instead rises tomorrow, either immediately or after a punch lower tomorrow morning, I would watch for likely potential resistance on 30-minute closes converging near 12460-12470. If the Dow can sustain levels above that on 30-minute closes, the next upside target and potential resistance level is marked.

The NDX showed us that 50 percent retracements of the week-long rally are more than possible.

Annotated 30-Minute Chart of the NDX:

Perhaps the NDX will also show us tomorrow morning whether that often strong support at a 50-percent retracement will prove to be support this time, too. If the NDX can manage sustained closes above that 50-percent retracement and gathered Keltner support from 2513-2517, it sets up a next upside target and potential resistance zone on 30-minute closes near 2530-2534. Above that, next resistance is likely to be kicked up toward the 2545-2550 zone.

If the NDX falls through the support it tested this afternoon, the Keltner setup suggests a next downside target near 2471-2474. I would, however, be aware of potential support on 30-minute closes at the intervening Fib bracket levels. Although you may not pay attention to Fib brackets, others do, and their support or resistance can become self fulfilling.

If the NDX showed us that it's possible for indices to reverse half of the week-long rally in one day, the RUT showed us that even that 50-percent level can be overrun.

Annotated 30-Minute Chart of the Russell 2000:

The RUT tends to overrun boundaries, so I'm not going to take the fall through the gathered potential support from 753-754.25 as confirmed just yet. However, those who want to see the RUT rise will want to see it gather its feet under it rather early tomorrow morning and push up again. If it doesn't, it's set a potential next downside target at about 740, although I would of course be aware of potential support near 747-748 and just below at a small gap from last week. A test of and failure to hold support near 740 sets up a potential retest of last week's low.

If the RUT can rise tomorrow morning, potential resistance on 30-minute closes now strengthens near 757-759 and again at 761-763. That looks like a strong configuration, but if the private audit of Spanish banks is released tomorrow and says that far less money is needed than expected and if a new poll is completed and shows that the anti-austerity crowd in Greece is losing ground, the RUT can easily pierce what looks like significant resistance on a 30-minute chart.

In normal times, here's the most likely scenario: Most indices fell to support levels that would indicate that they might attempt a bounce, perhaps after a brief punch lower tomorrow morning, but attempt is the operative word. The setups also suggest that the indices could then find resistance and roll over at the significant convergences of potential resistance that are showing up on various charts. This suggests more downside, and that fits with the fact that until we see those breakouts confirmed on the daily chart, the indices are in fact trending lower inside regression channels. Last week's rally was really nothing more than a bounce inside that descending channel.

So far.

Here's the thing about building such scenarios as that one in which indices could bounce, perhaps after an initial brief punch lower, but would likely soon find resistance. If the indices instead gap up tomorrow and run up all day long or, conversely, just give way into that capitulation day that we've all been awaiting, does that suggest that the attempt to study charts is useless? No, because such action gives us guideposts against which to measure the action. This is stronger than it should be if it's really going to decline further through the descending channel, we might decide if the indices break easily through first resistance and charge higher. Or maybe, something is at work here I don't understand. Or maybe, wow, indices are really even weaker than I thought because they didn't even attempt to steady on the nearby support before they tumbled lower. We can't use technical analysis to tell us where prices are going to go, but we can use it to tell us where they might go, to plan how we protect our trades, and then help us to recognize the signs when something else is afoot and our scenario is flawed. That tells us that our plans might need to be revised.