Market Internals


This weekend, voters across the globe created the perfect porridge, voting in ways that global finance ministers and market watchers had hoped they would. That porridge of votes turned out not to taste so good after all. U.S. bourses produced mixed results rather than the big gains many had anticipated if elections turned out as they did.

It turns out that the fallout from those elections may not be quite as definitive as desired. The doubts expressed from the "man on the street" post-election interviews to the behavior of the European bourses elucidates that doubt.

Let's see how it unfolded. By mid-afternoon ET Sunday afternoon, news sources reported that newly elected French President Francois Hollande's Socialists had won a majority in France. The Party and its affiliates landed 307 seats, well above the 289 needed to obtain a majority.

As the election neared, Hollande had been characterized as softening his demand for euro bonds, perhaps moving toward addressing some of Germany's concerns. In return, he seeks a growth pack. After the election, he headed for the G20 summit with more standing to argue for the more flexible deficit targets, joint deposit guarantees and resolution fund. That doesn't mean he'll receive all or even most of what he wants, however. He seeks a European banking union that settles the power on the ECB to supervise cross-border banks.

Although Germany, France and the other euro nations still have much to hammer out, the euro jumped on the news of this result and the concurrent projections for the Greek election. That initial leap higher wasn't to last, however.

At about the same time last night, many news sources and official projections from Greece predicted that Greece's pro-bailout New Democracy party had won and could possibly garner enough support from the third-place finisher, the PASOK party, to form a needed majority coalition. After the concession of the SYRIZA party, some PASOK party officials were signaling that possibility. By this morning, we learned that the two parties were meeting to decide whether the PASOK party would participate fully in the government or just vote with the coalition.

As with the French election, questions remain. Primary among them are the next tactics of the SYRIZA party, which claimed a close second place behind the New Democracy party. The strong showing of the SYRIZA party, popular among young people, may signal that rallies and riots will not end with the vote although the country was quiet today.

That strong showing certainly prods the New Democracy party to produce positive developments quickly, to instill confidence among the people and temper the importance of the SYRIZA party. Alexis Tsipras, leader of SYRIZA, declared that he would lead opposition to the austerity measures. As expected, he confirmed this morning that he and his party will not join the Greek coalition government.

According to some news sources, New Democracy's leader, Antonis Samaras, wants to re-broker the current deal with the "Troika" of the IMF, ECB, and European Commission. Samaras doesn't want to agree with the austerity measures as laid out in the agreement with the Troika. He may request two more years to institute the required cuts, for example. Germany and other countries assert that the original conditions must be met if future bailout funds are to be sent. The German Foreign Minister did speculate that "time axes" might be talked about again, according to a Reuters article, and some experts believe that the euro zone members may have impetus to help the New Democracy party in some way.

Fitch Ratings also weighed in on the Greek parliamentary elections. Acknowledging the narrow margin by which the New Democracy party won the parliamentary elections and the continued intense crisis in Greece and the eurozone, the agency still announced that it would not institute a "Ratings Watch Negative" alert for the entire eurozone. The agency had indicated it would do so if the threat of Greece exiting the eurozone was deemed an imminent event. The agency still believes that the rate of contraction is accelerating in Greece and that the liquidity position also deteriorates quickly, and warns that the new government must act quickly to address these issues. Other analysts, including those at Citi, believe that risks remain high that Greece could leave the eurozone within the next year to 18 months.

U.S. futures gapped higher last night, as did Asian bourses. The Nikkei 225 closed higher by 1.77 percent; the Hang Seng, by 1.01 percent; and the Straits Times, but 0.47 percent. European bourses opened higher, too, but then all dropped into slightly negative territory within one to two hours before attempting a bounce again. They eventually closed with mixed performances, but all well off their opening highs. The FTSE 100 closed higher by 0.22 percent; the DAX, up by 0.30 percent; and the CAC 40, down by 0.69 percent.

The yields on the Spanish 10-year bonds, one of the canaries in the coal mine, jumped again, moving above 7.00 percent, as the uncertainties attached to the outcomes of these elections and one other weighed on markets. Those yields ended the day at 7.158 percent, the highest since 1999 according to one report. A yield above 7.00 percent renders Spain's situation unsustainable, some economists have warned, while others say the 7.00-percent mark is more a psychological benchmark than an absolute line in the sand. Spanish Economy Minister Luis de Guindos cautioned that the rising 10-year yield did not take into account all the potential in the economy or the reforms the government had already enacted.

Also perhaps contributing to that rise was the Spanish Prime Minister's assertion that Spain would not immediately put the IMF's latest suggestions into effect since those suggestions are nonbinding. The IMF report had said that Spain's deficit-reducing goal would probably be missed. Hiking the value-added tax or VAT and further cutting government workers' wages were among the IMF's suggestions.

Somewhat countering that Spanish canary-in-a-coalmine marker, Bloomberg reported that Greek deposit withdrawals slowed today. An unnamed source reported that deposits remained unchanged, however.

Eurozone elections weren't the only ones being watched. After two days of voting with what some surmised was again a low voter turnout, Egyptians learned the identity of their first freely elected president. The Muslim Brotherhood claimed victory, with its candidate Mohamed Morsy winning over former general Ahmed Shafik. Despite nearly 100 percent of the votes being counted by the time dawn was breaking in the eastern U.S., U.S.-educated Morsy's election had not yet been officially finalized by that time.

One article noted that the new president would not learn what powers he would hold until today, when the ruling generals laid out those powers. However, the military did not wait that long. The military council met Sunday and issued a "constitutional declaration" that conveyed only limited powers to President Morsy. Having already dissolved the Islamist-led parliament shortly before the election, the military council said it would hold lawmaking rights now held by the parliament until such time as a new parliament was elected. Many declared this action a military coup, a setback to the democratic process. Some went so far as to say that the election and its aftermath solidified the control of the military council SCAF.

The U.S. has been applying pressure to Field Marshal Hussein Tantawi, chairman of SCAF, to honor his promise to relinquish control by July 1. Many inside and outside Egypt doubt that SCAF will ever hand over control.

After these developments, Fitch Ratings downgraded the Arab Republic of Egypt's long-term foreign currency. It was downgraded to B+ from BB- and given a negative outlook.

Against the backdrop of these weekend developments, the G20 meetings, the looming FOMC meeting and the ongoing 6-nation meeting with Iran, market participants proved hesitant in early U.S. trading. Any bit of news could change the directions of the market in an instant.

Monday's Developments

Fortunately, with this avalanche of information to consider, the U.S. had a light economic calendar today. The NAHB Housing Index measuring builder confidence was the only scheduled release. Experts had forecast that the index would drop to 28 from the prior 29, but it surprised at 29 again. The NAHB report said this was the highest level reached since May 2007. The report termed the improvement continued and gradual. The NAHB's chief economist David Crowe went on to caution that recent reports pointed to some softening of the rate of recovery. He warned that builders were seeing "overly tight lending conditions and inaccurate appraisals." The four regions surveyed saw mixed results, with the Midwest and West measuring gains of 5 and 4 points, respectively, and the Northeast and South each reporting declines of 2 points.

Amid doubts by attendees and watchers that any progress could be made, a six-country meeting with Iran began in Moscow. The U.S., Russia, China, Britain, France and Germany warn that they will extend Iran's isolation, both diplomatically and economically, if no deal can be brokered. President Mahmoud Ahmadinejad claimed that Iran would be willing to stop enriching uranium to the higher level that has so alarmed world leaders as long as other attendees found ways to meet the country's needs for fuel. With his star falling in Iran and Supreme Leader Ayatollah Ali Khamenei's grip strengthening, world leaders aren't certain that the president's assurances carry any weight or are trustworthy, if they do. They fear another stall while enrichment continues.

News bites began to filter out of the G20 meeting today. In a Bloomberg article, China's Premier Wen Jiabao was characterized as warning that the globe should not count on China producing a "growth bailout" as it did in 2008. That bailout amounted to 4 trillion yuan or $586 billion, injected into the economy over a two-year period, as well as a 17.6 trillion yuan credit surge. Those actions resulted in inflation, bad debts and a property bubble, the Bloomberg article notes. China's main task is to stabilize growth amid downside economic pressures, China's Vice Finance Minister Zhu Guangyao avowed while in Mexico for the conference.

A draft of the G20 statement viewed by a Reuters reporter suggests that the statement will likely affirm that Europe will "take all necessary policy measures" to work through its crisis situation("G20 urges Europe to take 'all necessary measures' on crisis," Luke Baker and Krista Hughes). President Obama will meet with European leaders this evening, with separate talks to be held with German Chancellor Angela Merkel.

In response to speeches after this weekend's elections calling for a loosening of austerity measures, Chancellor Merkel reiterated that those already agreed-upon measures would not be changed and that meeting them was a condition of future bailout funds to Greece. Instead of the banking union that French President Hollande wants, she proposes fiscal integration with budget oversight by Brussels. It is apparent that much remains to be resolved, and the resolution may not be smooth or quick. That porridge of election results might have been the right temperature, but the ingredients just weren't appetizing.

Covering the many important developments from the weekend has stretched this article to the limits of readers' willingness to read, so coverage of story stocks will be shortened. Of course, Microsoft (MSFT, 29.84, -0.18 or 0.60 percent) must be among those mentioned. As Jim Brown mentioned this weekend, those familiar with MSFT speculate that the company may be about to announce its own tablet. Some believe it may introduce one capable of Xbox Live streaming from a device in partnership with Barnes and Noble (BKS, 15.22, -0.38 or 2.44 percent). Estimated times for the announcement varied, but all were after this article was sent for publication.

Groupon (GRPN, 11.15, +1.09 or 10.83 percent) also figured among the story stocks. The stock was upgraded by Scott Devitt, Morgan Stanley analyst. In other news, Celestica (CLS, 7.70, +0.23 or 3.08 percent) will stop manufacturing services for Research in Motion (RIMM, 10.60, -0.29 or 2.66 percent), with CLS affirming Q2 guidance after the announcement.

Petsmart (PETM, +2.37 or 3.56 percent) increased its quarterly dividend. Oracle (ORCL, 27.12, -0.58 or 2.09 percent) dropped on speculation that a key executive had left or would soon leave.

Let's look at charts.


For the last several weeks, I've noted conditions under which we could conclude that the downtrend had changed. We should not believe in a rally until prices sustained daily closes above descending regression channels in which the indices had been trending down, I warned. I further noted that when the SPX strengthened, it tended to find support on a flattening or turning-higher 9-ema. Let's see if those conditions were met.

Annotated Daily Chart of the SPX:

The SPX did find support on a flattening 9-ema, one early sign of strength. It also has tentatively broken out of its descending regression channel.

All is well for now, but market participants must realize that waking up to bank runs throughout Europe or some other such event would change chart setups in an instant. In current market conditions, those who are in net long positions on SPX-related trades want to continue to see the SPX maintain daily closes above the (red) 9-ema on pullbacks. In fact, they would prefer that pullbacks stop ahead of that level, at the confluence of the (peach) 45-ema and (green) 120-ema. As of now, price has barely pulled free of the spider's web of historical, Keltner and Fibonacci resistance (not shown on chart) in which it's entangled, even if it has struggled past recession channel resistance.

Today's climb was made on a small-bodied, almost-doji type candle that would be more indicative of indecision than of great strength. Keep open the possibility of a disappointment-induced drop through to test support again. First steps have been made toward a possible upside target at the first green oval, but the SPX needs to maintain those daily closes above the 9-ema to maintain that upside target. Otherwise, another drop toward 1284-1290 looks just as likely.

Like the SPX, the Dow has sustained daily closes above a flattening 9-ema long enough to turn that moving average higher again, a confirmation of short-term strength. This narrower big-cap index has pushed higher above the converged Keltner and regression channel resistance than did the SPX. Now it's up to market participants to watch how it behaves now that it's more closely testing next resistance from 12750-12840. Today's candle was also indicative of indecision.

Annotated Daily Chart of the Dow:

That candle today often presages more sideways action or even a pullback. If it's a pullback, those with net long positions want to see the Dow maintain daily closes above the turning higher (red) 9-ema. That type of action preserves greater chances of the Dow hitting the next upside target near 13060-13100, although no target is guaranteed. Sustained closes beneath that turning-higher 9-ema and especially below 12500 set up the possibility of a drop toward 12340 or even 12200.

The likes-to-break-through-boundaries NDX doesn't adhere quite so closely to daily support or resistance on the (red) 9-ema, but it still shows some adherence.

Annotated Daily Chart of the NDX:

Note from the left side of this chart how the NDX does tend to find support on daily closes on the rising (red) 9-ema when it's in an uptrend. Traders who are net-long NDX trades or stocks want to see the NDX find support on that rising moving average on any pullbacks. Such support preserves the chance that the NDX will eventually make it to the next target near 2705-2722. It must be noted, however, that the NDX hasn't quite set that upside target, as it hasn't broken convincingly free of the confluence of resistance near 2580-2610.

A failure to preserve daily closes at or above 2525-2550 sets up the possibility that the NDX will set up a new downside target near 2490 or perhaps even 2450-2454.

The relative weakness of the RUT with respect to its descending regression channel, Keltner levels tested and even Fibonacci levels (not shown) is apparent on its daily chart when it is compared to the action on the prior charts. Since the RUT is typically a leader, this signals some remaining reserve.

Annotated Daily Chart of the RUT:

The RUT has attempted to break out of its descending regression channel, at least as drawn by think-or-swim's automatic tool, but the breakout remains unconvincing, especially since it hasn't cleared converging overhead Keltner resistance. Big money just isn't ready to sink a lot of money into small caps in this market environment.

As readers can determine from studying the left-hand side of this chart, the RUT shares the SPX's and NDX's propensity to scale the side of a rising (red) 9-ema when it's showing strength, and the RUT just hasn't managed to do that consistently yet in the current market conditions. It has produced several closes above that moving average, and it's maintained prices that have turned the 9-ema higher, so that's all good. Those hoping for more strength and a new upside target want to see the RUT break above historical, Keltner and Fibonacci resistance grouped from about 775-776 and then 784-789 and maintain closes above those levels. That sets up the potential for a test of 800 and then 816-822 if the RUT could make it past that resistance.

If the RUT should fall back, those hoping for more upside want to see consistent daily closes above that 9-ema. Otherwise, the RUT would threaten new downside targets near 750 and possibly even 736-742.

I thought I might show a snapshot of the Spanish Government Generic Bond Yields, one of the charts avidly watched by many across the globe.

Annotated Daily Chart of the Spanish 10-year Bond Yields:

This Bloomberg-provided chart might be watched by traders eager to assess whether eurozone risks are rising or declining.

Tomorrow's Economic and Earnings Releases

The six-nation meeting with Iran in Moscow continues tomorrow. That conference, the G20 meetings and continued news out of Europe all have the power to move markets either direction. Our FOMC meeting begins tomorrow, but unless some kind of concerted central market action is deemed necessary, we're unlikely to hear anything out of that meeting until Wednesday. In this kind of environment, it remains somewhat problematic to lend too much credence to what we see on intraday charts, but let's take a look at what is visible. We might be surprised.

What about Tomorrow?

Some 30-minute charts will show us that the indices have traded more in concurrence with expected norms than we might have anticipated in this environment. On my Keltner charts, prices usually stay within the mid-sized purple channel based on the 45-ema. As would happen with the more traditional Bollinger bands, prices tend to find support and resistance at the channel boundaries. Breakouts or breakdowns on sustained 30-minute closes are usually meaningful and set next targets at the widest boundaries. That kind of behavior is just what we see on several of the index 30-minute charts.

Usually, however, an upside breakout signals strength. In the SPX's case, prices cling more to the breakout marker than they do zoom to the next target. It did manage to closely approach the upside target, dropping to the 9-ema by the close. Was this it?

Annotated 30-Minute Chart of the SPX:

As long as the SPX maintains 30-minute closes at or above the (red) 9-ema on pullbacks, it confirms its strength. Sustained 30-minute closes below it, especially long enough to turn that moving average lower, indicate growing weakness and set up potential downside targets at the marked levels.

Eventually, the SPX will pull back all the way to the (light grey) bottom of its smallest channel. If this happens, watch that 9-ema for possible resistance on bounces and watch the marked zones for next potential support. Realize that these zones will move in the direction of the price change tomorrow.

The Dow performed as expected when it broke out of the mid-size Keltner channel. It charged right up to the next Keltner target. On successive pullbacks, it found support on 30-minute closes at the (red) 9-ema and then would charge higher again. Until it didn't.

Annotated 30-Minute Chart of the Dow:

The Dow was barely clinging to a flattening or turning-lower (red) 9-ema this afternoon. Sooner or later, the Dow will need to pull all the way to the (light grey) bottom of its smallest channel and recharge. If this chart were to believed, that "sooner or later" would be sooner, but we know better than to believe that the evidence of an intraday chart will hold overnight in this news-driven market.

If a lower channel boundary test should happen, the Dow could fall further, to the (peach) 45-ema. On successive bounces, watch for potential resistance at the 9-ema. When the Dow is climbing that moving average, it's showing strength and marked upside targets may be hit. When it's not and that average turns down, the short-term rally has changed, and downside targets may be hit.

Like the Dow, the NDX charged right up to its upside target after it broke through the (purple) midsized channel.

Annotated 30-Minute Chart of the NDX:

The NDX shows continued strength as long as it sustains 30-minute closes above the (red) 9-ema. As long as it does so, marked upside targets may be reached. Sooner or later, it will need to drop to the (light grey) bottom of its smallest channel. When that happens, watch for potential resistance on 30-minute closes at its 9-ema when bounces occur. Sustained 30-minute closes beneath that 9-ema mean the short-term trend may have changed, and next marked downside targets may be hit.

The RUT, like the SPX, isn't behaving quite as one would expect. Yes, its prices were mostly contained within the central mid-sized channel. Then it broke out to the upside. However, its attempts to break out above the (purple) midsized channel have not convincingly broken prices above that resistance. It's churned across the 9-ema rather more than one would like if were finding strong support there. Nor has it reached all the way up to its next upside target, questioning whether its breakout is trustworthy.

Annotated 30-Minute Chart of the Russell 2000:

Those hoping for more upside want to see the RUT hold 30-minute closes at or above a rising 9-ema. They want to see the RUT zoom up to the next upside target. Sustained 30-minute closes above that moving average will increase the chance that the RUT will test its marked upside target and push it higher on the next pullback and test.

Sooner or later, the RUT will need to pull back to the bottom of its (light grey) smallest channel, as it did early this morning. If it does, the 9-ema should be watched for potential resistance on subsequence bounces. A push back through that 9-ema and sustained values above it starts the process over again. A rollover from that moving average increases the chance that it will test marked downside targets instead.

What do I think? I think markets got the Goldilocks solution they wanted and then decided it wasn't nourishing or tasty enough. Those elections only pushed some worries into the future and perhaps not into the far future. However, conditions weren't so bad that they necessitated a hoped-for coordinated action by central banks across the globe and that dampened enthusiasm. I also think that our markets remain hopeful of a FOMC move and will be disappointed if it doesn't come.

If you're considering trades right now, structure them so that they can endure big moves either direction or else construct equal risk/reward trades that you can let run with lottery money amounts. As long as these indices sustain closes above their 9-ema's on daily and other charts, they're showing strength, no matter how disbelieving we might feel when we read the news. I'm like Goldilocks, however, feeling a little picky and uncertain about what I like. I'm trading, and I certainly adjusted my trade to account for upside risk today, but I'm trading cautiously. I suggest you do so, too.