Market Internals


As expected, U.S. markets circled in a holding pattern today. Many indices pulled back slightly, with the noteworthy exception of the Dow Jones Transports, which is usually a market-positive development, and the volatility indices, which is usually a market-negative development. The NDX's, COMP, and SOX pulled back harder than the SPX, OEX and Dow.

U.S. market participants had little news to distract them from the developments due later in the week. However, we can draw the conclusion that even important economic releases would have made little difference when we look at global bourses. That same holding pattern was visible even on those bourses where economic releases proved important.

For example, China's retail sales met expectations, but both fixed asset investment and industrial production proved a little shy of expectations. Industrial production was expected to increase 9.0 percent, down from the prior 9.2-percent growth, but it grew only 8.9 percent instead. While that growth still sounds quite robust, industrial production has been trending down since early in 2010, when it measured 20.7 percent growth in March, 2010.

Other news was better, at least on the surface. The country's trade surplus grew more than anticipated. Exports gained, but only 2.7 percent more than the year-ago level. A closer examination of the number reveals that the greater-than-anticipated surplus was due at least in part to shrinking imports. The Shanghai Composite added to Friday's gains, gaining 0.34 percent, but it may be important to note that it did so without ever topping Friday's intraday high of 2144. The high of the day for Monday was 2140.17, and the index closed at 2134.89. It was in a holding pattern.

Other Asian bourses also turned in the kind of mixed performances that we see when investors are on hold. The Nikkei 225 closed lower by 0.03 percent; the Hang Seng, up by 0.13 percent; and the Straits Times, down by 0.10 percent.

Monday's Developments

During our premarket session, the FTSE 100, CAC 40 and DAX traded near the flat-line level while owners of stocks in Spain's IBEX 35 showed a stronger propensity to pull back from new purchases or dump old ones. The FTSE 100 closed lower by 0.03 percent; the DAX, by 0.01 percent, and the CAC 40, by 0.37 percent. Spain's IBEX dropped 0.32 percent. Most European bourses spent the day churning as they settled deeper into a holding pattern, too, despite their busier economic release schedule today and further news out of Greece. After a sharp decline from the August 31 peak, yields on Spanish 10-year bonds rose, although only to 5.696 percent, well below their scarier levels from last month. Yields on Italian 10-years rose from last week's low, too, to 5.18 percent today.

The news from Greece was that Greek Prime Minister Antonis Samaras met with creditors today. His government has apparently not been able to secure agreement his party's coalition partners on the spending cuts that will be enacted.

Our own economic schedule was light today, with the Consumer Credit released at 3:00 pm. Predictions had been that credit would rise $9.1B, but instead it dropped $3.3B. This was the first drop in eleven months.

I was actually a little surprised to see that the markets dropped after this announcement rather than jumped higher again. Depending on the interpretation, this might be taken as a sign of a slowing economy, boosting hope for more easing. However, one quirk in the report, its reformulation, may have clouded that interpretation.

This report was for July, and it represented seasonally adjusted decrease of 1.5 percent for total credit. The annual rate for revolving credit decreased 6.75 percent, but non-revolving credit increased 1 percent. Non-revolving credit represents auto and student loans. While it gained, its gain was much slower than the prior 9.8-percent gain in June. However, this was measured against an upward revision of data from December 2010 on.

Story stocks started with AIG (AIG, 33.30, down 0.69 or 2.03 percent). Soon the U.S. government will be a minority and not a majority investor AIG stock. The government's stake will decrease from 57 percent to about 20 percent, it was announced today. The sale is likely to bring a profit to the government. The breakeven point for the Treasury is $28.72. After hours, the stock was trading at 33.12 as this report was edited.

While the U.S. Treasury was expected to sell stock this month, the size of the offering surprised market watchers when the Treasury announced those plans today to sell $18 billion in stock. The company itself planned to buy as much as $5 billion of the offering. Since AIG owns a small savings bank, the stock sale now brings AIG under Federal Reserve regulation.

BP (BP, 42.04, up 0.11 or 0.26 percent) took its place among today's story stocks, too. The company announced that Plains Exploration and Production Company (PXP, 36.09, down 4.24 or 10.51 percent) would buy its interests in a number of deepwater oil and gas fields in the Gulf of Mexico for $5.55 billion. This divestiture was part of a previously announced plan that will allow BP to concentrate investments and activities in what the company feels are its growth opportunities.

In other news, Glencore International PLC sought approval from Xstrata PLC's board and shareholders for a new and improved offer. The new plan allows for Xtrata Chief Executive Mick Davis to lead the combined company for six months before the Glencore CEO assumes the reins. Glencore also upped the offer from 2.8 Glencore shares for each Xstrata share to 3.05. Predictions of the ultimate success are mixed, with a decision to be made by September 24.

Intel (INTC, 23.26, down 0.93 or 3.84 percent) and International Paper (IP, 34.79, down 1.51 or 4.16) might have preferred not being included on a list of story stocks. A downgrade from Nomura Holdings pointed to possible lower earnings for INTC next year, and a downgrade from Deutsche Bank AG warned that expected price increases might not materialize. Deutsche Bank also downgraded other paper and packaging producers PKG, KS, and RKT.

Today, Lee Shavel, Chief Financial Officer for Nasdaq OMX group Inc., spoke at the Barclays Global Financial Services Conference in New York. He defended of the group's compensation plan for those harmed by the Facebook (FB, 18.81, down 0.17 or 0.90 percent) IPO.

We can't have a summation of story stocks without mentioning Apple (AAPL, 662.74, down 17.70 or 2.60 percent). The stock that had been supporting the NDX and other indices withdrew some of its support today ahead of its midweek product release. After the close, AAPL was still dropping hard. As Jim Brown has mentioned, AAPL has a tendency to sell off after these product releases, and investors and momentum buyers might have just become nervous ahead of the release. Apple product owners and Apple investors may have different takes on the upcoming releases.

Let's look at the daily charts for an overview.


Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

The SPX has continued to climb through its rising regression channel. It currently seems snagged or caught by the upper (purple) Keltner channel boundary that is usually resistance on daily closes. As the SPX chart shows, that Keltner channel mostly contains prices on daily closes but can be overrun. There's certainly nothing here to suggest that the SPX can't or won't run up to the top of the rising regression channel. The action does, however, suggest that the SPX hasn't yet pulled free of this Keltner channel resistance and could still roll over and fall back toward the rising 9-ema. In normal market conditions, today's close would suggest that is the most likely scenario. That 9-ema also happens to cross quite close to the rising regression channel's midline. It makes a likely spot for potential support, if tested. However, we know that these are not normal market conditions but those in which we're on hold, and what happens in the middle of the week can undo anything we see on these charts tonight.

A failure to hold support on daily closes at the 9-ema suggests a further downturn toward the bottom of the rising regression channel, where support on daily closes might lie anywhere from about 1392-1405. What bulls don't want to see happen is that channel's support lost on consistent daily closes or for the SPX to barrel far below that support zone and not immediately reverse on any given day.

The SPX hasn't pulled free of that Keltner channel's resistance but neither has it been strongly repelled by it, despite what we saw this afternoon. Bears must prepare for the possibility that the SPX could break free and reach toward the top of that rising regression channel and even up toward 1480, although today's candle perhaps did slightly lessen the probability of that happening. We have two types of channels visible here, Keltner and regression, so I want to be clear. As long as price breakouts above the purple channel's upper boundary are maintained on daily closes, a tentative target up toward 1480 is maintained. Today's close erased that breakout from Friday, but this is one day's action only, and we have to wait for confirmation.

If the SPX should break higher, 1450-1456 looks like rather strong likely nearest resistance on daily closes and 1390-1393 looks like rather strong support on daily closes. Which is most likely to be tested, that support or resistance? You're going to have to ask a bunch of people on a German court, on INTC's board, and among the voting members of the FOMC to get that answer. I don't have it.

Annotated Daily Chart of the Dow:

As has been true lately, the Dow looks a little weaker by both Keltner and rising-regression-channel standards. The Dow hasn't reached the analogous Keltner channel boundary, and it's only at the midline of its rising regression channel rather than in the upper half.

Resistance on daily closes could kick in anywhere from the midline of that rising channel up to the upper purple channel boundary. The Dow today was testing the bottom of that potential resistance level. Support at daily closes could lie at the rising (red) 9-ema or as far down as about 13028, and still count as maintaining the Dow's upward trend.

As long as the Dow maintains prices within that rising regression channel, it's still on an upward trajectory. Bulls should be wary of further sharp declines if the Dow should not maintain that channel or at least the 13028 level on daily closes. Lower potential targets are marked if a breakdown should occur.

This paragraph should be taken with a grain of salt because it's based on a technical setup, and we know that this market is running on headlines. It looks as if it's time within a few days for the Dow to pull back and test its rising red 9-ema, and that sentence was originally typed before the afternoon decline. The Dow could do so by just dropping to that average or by rising first toward 13420 and being sharply repelled back toward the 9-ema.

The red 9-ema is rising, however, and may have risen quite close underneath the Dow by the time it's tested unless the Dow drops straight to it from here. If that 9-ema is tested, bears should be aware of the possibility of another bounce from that moving average, up toward the marked potential upside targets, where resistance might lie. Bulls should be concerned if there is no bounce from that 9-ema if it should be tested.

Annotated Daily Chart of the NDX:

In opposition to the Dow's weaker-than-the-SPX performance, the NDX has looked stronger than the SPX, at least with regard to its rising regression channel. The NDX broke to the upside out of its rising regression channel and has mostly used that channel's upper boundary for support on daily closes.

It even overrun the nearby Keltner channel boundary that the SPX is just now testing, at least for a day or two. However, despite punching through that Keltner boundary a time or two, the NDX was not been able to build on those breakthroughs, and this afternoon's sharp selloff looks like a reversal after that test. It's as if the NDX was mired in tarry resistance that it couldn't quite break through, and AAPL's performance today perhaps dumped fresh tar into those pits.

The red 9-ema and the top of that former regression channel wait just below this afternoon's low, perhaps to offer support once again as they have done these last few weeks. Or, the NDX could be pulled back down into the regression channel from which it broke out in the middle of August. For now, a pullback toward 2750 looks at least possible if not yet probable.

The developments Wednesday and Thursday could provide the impetus to break it to the upside or downside. Potential next targets and support and/or resistance zones are marked.

Annotated Daily Chart of the RUT:

The RUT has set up a case all of its own. It began forming a climbing regression channel at the same time as the other indices, but it was a tight, sharply climbing channel that the RUT broke through in mid-July. The RUT fell through the lower boundary of the channel, then climbed along the underside of the original channel and formed a new tight channel. However, all that action can be encompassed by a larger rising regression channel, and that's the channel that I've included in tonight's Wrap.

After underperforming the other indices by several measures, including its position within its Keltner channels, the RUT zoomed up in a remarkable performance last week and climbed above the Keltner channel that typically contains most RUT movements. It has technically set a new Keltner target up near 882, but I would hold off on anticipation of participating in a move up toward 880. I wouldn't buy my confetti just yet.

The RUT high-momentum tendencies can and do sometimes just overrun boundaries. We have to temper our excitement or fear about these breakouts. We also note that the RUT now tests the top of that redrawn rising regression channel. The RUT has been nibbling at the March 26 closing high of 846.13, but it just hasn't been able to manage a higher close as yet. It's still resistance, but it's so close that we can't make predictions about whether it won't or will be exceeded, particularly in this week's trading environment.

If the RUT can build on breakouts above that closing high and the March 27 intraday high of 847.92, then it sets that potential upside target just above 880. However, I would not consider that potential target set unless those parameters are met, and even then, I would remember the word "potential" in that potential target.

If the RUT should drop instead, support on daily closes might be found near 834-837 or lower, at the rising red 9-ema. Below that, the zigzags of recent months have produced many chop zones that might provide support at regular intervals along the way toward the bottom of the rising regression channel. Those most likely potential support zones are marked on the chart. Which might be the important support level is impossible to pinpoint.

It will be psychologically important to see the RUT maintain daily closes above about 787, which marks a regular old rising trendline that can be drawn from the June and August lows. Also, many of us remember daily opens and closes and intraday highs and lows near 787, so it's a number burned into the RUT trader's brain. Remember that the RUT can move as fast or faster when going downhill as it does when going uphill.

Which move is the most likely, above the March highs and up toward 880-882 or down to and maybe below 787? Again, we'd have to ask all those men and women meeting to make decisions here and in Europe to give us some hints. However, from a purely technical standpoint, when prices approach the top of a rising channel in which the index has been traveling for months, I would tend to think it's time to pull back at least a little through that channel. Investors typically need to regroup even if prices are going to charge higher again. That supposition is totally undone if the RUT maintains daily closes above 847.92 for more than a day or so, however.

Chartists might also note that the VIX bounced strongly off today's 13.97 intraday low to close at 16.28. While a one-day bounce proves little, it does remind us of reversal potential in the VIX and also in the SPX. The RVX, the RUT's volatility index, also showed a gain, but in a doji-type inside-day candle that is perhaps not offering a clear signal.

Tomorrow's Economic and Earnings Releases

Tomorrow will be more about positioning for Wednesday and Thursday than it will be about anything that happens tomorrow, unless some announcement is felt to materially impact the decisions made those two days. Anyone who follows the global economies with a modicum of interest knows that Wednesday, the German Constitutional Court is expected to announce its decision on the constitutionality of the ESM, the European Stability Mechanism. The court could elect to ban the German government from joining the ESM, delay a final ruling until later, or allow Germany to move forward with signing the instruments of ratification.

Chancellor Angela Merkel's Finance Minister, Wolfgang Schäuble, believes that the euro bailout fund, as constructed, will not violate the German Constitution. However, one well-known Christian Social Union politician, Peter Gauweiler, submitted a petition to the court, asking it to delay the ruling. He bases his petition on the premise that Thursday's decision to buy euro bonds invalidates all the ESM treaty discussions that preceded that decision. According to an article in the German newspaper Speigel, the backers of the original complaint before the court are ready to throw their support to Schäuble's petition, too (Wittrock, Philipp. "Euro Bailout Fund Faces New Court Challenge in Germany."). When I research the topic, I find opinions that vary from the "of course they'll say it's constitutional" to "they take this very seriously and may not."

Ahead of the Germany's constitutionality ruling expected on Wednesday, we knew we would get increased headlines about the course of the eurozone, and we did. George Soros voiced his conviction that Germany will be pulled into recession within six months. The chairman of Soros Fund Management claimed this wasn't a prediction but rather was an observation. While others have been clamoring for Greece to leave the Eurozone, Soros thought it might be necessary for Germany to do so if it was going to make such onerous austerity demands on other countries. He at least noted that it would be preferable for Germany to stay in the eurozone.

Of course, Wednesday also figures as the date of Apple's (AAPL) product announcement. With several indices seemingly rising on the back of AAPL's climb off its May low, that stock's performance can and likely will impact our markets' performances.

Thursday, the 13th, the FOMC will release its rate decision. The accompanying statement will likely be more important than that decision. Markets have been rising in anticipation of more easing despite concerns about whether that easing will do anything to free up monies for loans to businesses and prospective homeowners, among other concerns. That Thursday release will be followed by an auction of 30-year bonds in the U.S., and then by the FOMC Press Conference.

What about Tomorrow?

Do intraday charts give any more hints than daily ones?

Annotated 60-Minute Chart of the SPX:

As with the daily chart, most candle bodies are contained within the purple channel, but last week produced a breakout that zoomed all the way to and slightly beyond the upper boundary of the widest of the nested Keltner channels shown here. By today's close, the SPX had erased that breakout and was perched on light potential support on 60-minute closes near 1430. In normal market conditions--not what we have now--this setup would give about equal probability to a drop toward 1424 as to a climb back toward 1433-1436. If the SPX does climb, watch for potentially strong resistance on 60-minute closes at that 1433-1436 zone. If the SPX zooms above that and doesn't soon reverse, within a couple of hours, then we're in an anything-goes, breakout configuration again. Further upside and downside potential targets are marked on the chart.

Remember that these lines are dynamic and will change as the day progresses tomorrow.

Annotated 60-Minute Chart of the Dow:

The Dow also broke out of its purple channel last week, but, unlike the SPX, it neither reached nor violated its upside target. It has now dropped back inside the channel that contains its prices on most 60-minute closes. Like the SPX, it closed the day perched on light potential support, at about 13250 in the Dow's case. As of the close, a bounce up toward 13280-13310 looked about as likely as a drop toward 13210 or vice versa. If the Dow should bounce, watch for potentially strong resistance in that 13280-13310 zone. If either that resistance or the support near 13210 are violated on 60-minute closes, next potential resistance and support levels are marked.

Annotated 60-Minute Chart of the NDX:

The NDX's chart shows that prices can move as quickly to the downside as they can to the upside. Like the other indices, the NDX broke out of its purple channel last week. It zoomed up to its upside target. After a day of stalling below it, prices tumbled. As of the close, a rise toward 2800-2802 looked about as likely a drop toward 2775-2782, and vice versa. It's possible that strong resistance on 60-minute closes will now be found near 2802 or strong support on 60-minute closes near 2780. If either of those is tested, watch for prices to bounce down from or up from that test. If the NDX instead punches through on consistent 60-minute closes, next potential targets are marked. Bulls do not want to see 2775 or so violated on consistent 60-minute closes.

Annotated 60-Minute Chart of the Russell 2000:

This chart may seem too messy and difficult to follow, but I wanted to illustrate something that might be helpful to those who don't follow Keltner channels or Bollinger bands or any similar channeling system. I've snapped a Fibonacci bracket on the last rally. These are available on most brokerages' charting systems. Some of the Keltner resistance levels line up fairly well with import Fib bracket levels and would possibly line up even more closely if the RUT were to decline. Whatever one feels about Fibonacci numbers, we know that many people watch this bracket. There's sometimes a self-fulfilling quality to the retracement levels they show. For example, since the 38.2, 50 and 61.8 percent retracements are closely watched and people feel that there might be bounces from those levels, they may step in to buy as those levels are approached and may produce that bounce. I would note, too, that 835 could turn out to be a possible support level, if it's touched. If so, I would watch for potentially strong resistance if a bounce ensues and the 9-ema is retested. Some Fib followers feel that if more than 61.8 percent of a move is retraced, the whole move is likely to be retraced, so bulls would not like to see the RUT drop below about 820 and not immediately rebound.

What does it all mean? Nothing. It means we're in a holding pattern. It appears that there may be a tendency to pull back a little and await those results from Wednesday and Thursday, but even that is not a given, and what happens after those results are not predictable in my opinion. The low levels of the volatility indices coupled with the high levels of the indices gives me an uneasy feeling, but then I've been having to adjust all my trades so that they can better endure rabid rallies.

One concern that might be totally out in left field is that some announcement could come early or late. Be prepared for anything this week.