Market Internals


The SPX, DOW, NDX, OEX, RUT, and SOX all closed lower today on a typical Monday pullback. Retailers as represented by the RLX also dropped, as did the financials represented by the BIX. The Dow Jones Transports and Utilities both outperformed, however, gaining 0.21 percent and 0.09 percent, respectively. The dollar gained, as did yields on 10-year treasuries. Gold and /CL futures dropped.

Equity investors and traders hunkered down today, alert for the possibility that their positions could be bombarded by developments from Europe or warnings as earnings season opens. Perhaps they should be looking further east, too. The World Bank warned that the slowing of growth in China would result in an East Asian growth rate that was the lowest in eleven years. Their designated East Asia region excludes both Japan and India. The new projected +7.2-percent growth rate was revised lower from the prior +7.6-percent projection.

The World Bank also lowered inflation forecasts, commenting that this left room for emerging economies to add stimulus. While we might be struggling with higher food costs in the U.S. due to drought's damage on corn crops, rice harvests were plentiful in Cambodia, Vietnam and the Philippines.

The Nikkei 225 was closed last night for the Health-Sports Holiday. The Hang Seng dropped 0.89 percent; the Straits Times, 1.00 percent; and the Shanghai Composite, 0.56 percent.

European finance ministers began meeting today. Spain's difficulties certainly were front and center as many European bourses headed lower in early trading.

The FTSE 100, however, managed a positive close, up 0.24 percent. The DAX closed lower by 1.44 percent; the CAC 40, by 1.46 percent; and Spain's IBEX 35, by 0.80 percent. Some pundits blamed a decline in Germany's Industrial Production number for the poor performance in Europe. However, that number declined to a -0.5 percent level when it had been expected to show a deeper decline, to -0.7 percent. It was a better-than-expected result. With the Eurozone's Sentix Investor Confidence dropping to -22.2 and this week's challenges in Europe, investors just might not have been in the mood to do a lot of buying.

Monday's Developments

Today the European Stability Mechanism (ESM) Fund was launched. It was launched with a Fitch Ratings long-term Issuer Default Rating (IDR) of "AAA" and a Short-Term IDR of "F1+" with a stable outlook. Fitch mentioned "exceptionally strong mechanisms for exercising callable capital, including an 'early warning system (EWS)'" and a "relatively high capitalisation rate" as reasons for the ratings. Meanwhile, other newspaper article titles unapologetically call the European monetary union a failure. Such is the climate these days, one of rancor and assertively stated but polarized opinions. It's difficult for fund managers, much less mom and pop investors, to ascertain the current situation.

Whether Spain will formally request help and when it will do so was certainly debated among the seventeen finance ministers participating in today's meeting. Those debates will undoubtedly carry over tomorrow, when the expanded list of twenty seven European Union finance ministers meet.

While representatives from Spain make the claim that Spain may not need a bailout, ECB President Mario Draghi keeps reiterating that the ECB stands ready to deploy its bond-buying plan. Commentators worry that Spain may delay too long in asking for help, resulting in more tumult than might otherwise have occurred.

Yields on Spanish 10-year bonds have eased from their summer highs. Today those yields climbed to 5.714, up 0.028, but they stayed well below the 6.00 level that first signaled alarm and the 7.62 high from the summer. Some market watchers speculate Spain may be delaying asking for help in hopes that rates will drop further, obviating the need for a bailout. Spain counters calls to formally request a bailout with the argument that they haven't even been told what the required conditions for such bailout funds would be.

We typically have to include Apple (AAPL, 638.17, down 14.42 or 2.21 percent) in the story stocks each Monday. Let's start them with AAPL today. Last Monday, I reported on a weekend shutdown of Foxconn in China, described variously as an assembler of the new iPhone 5 devices and/or a manufacturer of the back plate. Despite Foxconn's denials that the trouble was anything but a minor difficulty quickly resolved, trouble apparently continues. I use the word "apparently" because the company describes the disputes as two isolated incidents while others say that the workers have been striking. Minor disruption or major, iPhone production was again stopped, at least temporarily. News of difficulties faced by the more than 1 million Foxconn workers have included stories of abusive guards and too-strict quality control measures required by AAPL.

The Wall Street Journal reported speculation today that AAPL plans to build 10 million new tablets in the fourth quarter, while AMZN will build only 5 million. This speculation arises from the components ordered from suppliers. As this report was prepared, AAPL had continued dropping after the close and was last at 637.12, down $1.05 from the close.

APPL Daily Chart:

Another frequent face among the story stocks is Facebook (FB, 20.40, down 0.51 or 2.44 percent). Some commentators blamed a BTIG LLC downgrade for the FB drop, but we know from Jim's commentary over the weekend and in prior weeks that other reasons exist.

After the close, Reuters reported that Facebook has filed a new settlement agreement in U.S. District Court in San Francisco. Under the terms of the agreement, users could apply for a cash payment of up to $10 each in a case which accuses FB of violating the rights of users in an advertising feature, "Sponsored Stories."

Netflix (NFLX, 73.52, up 6.96 or 10.46 percent) was a gaining stock in a down day. Morgan Stanley upgraded the stock. I happened to have checked the short float on NFLX for an article I was writing last week. It's currently listed at 28.70 percent. This is what happens when you have a high short float and a stock gets upgraded. If the stock price bumps higher on the upgrade, shorts cover, and there are a lot of shorts to cover in this instance. They drove NFLX price up into the gap from late July, so we'll have to see whether the price holds at these levels once shorts get through covering.

Walmart (WMT, 75.25, up 0.12 or 0.16 percent) and American Express (AXP, 58.82, up 0.26 or 0.44 percent) want to take the money of "tens of millions of Americans." That's right. They announced the launch next week of Bluebird, billed as a prepaid card that is "an alternative to debit and checking accounts." It provides an advantage to Bluebird customers, the companies say, because it provides the means by which they might "better manage and control their everyday finances." Accounts for the prepaid card will have no minimum balances, monthly, annual or overdraft fees. Deposits can be made via smartphone, payroll direct deposit, remote check capture or using cash at any Walmart register. The Bluebird card could be used at the locations that accept American Express cards. Alerts can be set up to help all those tens of millions of potential customers control accounts. Checking, savings and debit cards can be linked to the Bluebird account.

Rivals Green Dot (GDOT, 10.25, down 2.60 or 20.23 percent) and NetSpend Holdings INC. (NTSP, 9.96, down 0.79 or 7.35 percent) dropped heavily. Green Dot cards are sold in WMT. NTSP cards aren't.

Many market watchers have worried about the upcoming earnings season. Today, Affymetrix (AFFX, 3.71, down 0.60 or 13.92 percent) dropped after lowering guidance for Q3 earnings to $80 million from the prior $84.56 million. The company said its business is stabilizing and blamed the tightening of academic funding across the globe for the lowered guidance. On its website, the company describes itself as a company "evolving into a provider of scalable, innovative genomic analysis tools and reagents for discovery, exploration, validation, and genetic testing."

After hours, Edwards Lifesciences (EW, 107.41, down 1.04 or 0.96 percent) joined AFFX in guiding lower for its Q3. This medical device maker blamed weak transcatheter heart valve sales. As this report was prepared, the stock had dropped sharply in after-hours trading and was last at $92.00, down 15.41 from the close.

Any readers who went through the Flash Crash or the Knight Trading debacle or even investors caught in Friday's latest high-frequency-trading incident that plunged India's main share index 16 percent in minutes might be glad to know that HFT has actually been beneficial to the markets. Supposedly, HFT increases transparency and the ease of detecting abuses. So said Tanuja Randery, chief executive of MarketPrizm. RDN Associates' economist Roger Nightingale agrees, saying the economic crisis prompted the glitches, not any inherent problem in HFT. The two disagreed on whether compliance and regulation could help stop the glitches.

Randery doesn't want HFT regulated: he wants more risk checks and compliance before the HFT algorithms are fired up. According to the information provided in a CNBC article by Holly Ellyatt, Nightingale says that those steps never stopped "any problem in the universe" and that it was impossible to prevent problems before they occurred and such efforts should not even be tried ("High-Speed Trading Is Good for Markets: Pro"). Problems should be corrected after a problem occurs. Huh? Let's let a few global indices or clearing houses crash, and we'll just clean up the mess that prompts afterwards?

The geopolitical climate heated up this weekend. Venezuelans voted in a race in which final polls had shown President Hugo Chavez and his challenger, Henrique Capriles, neck and neck. Voting was reportedly heavy. Lines had formed at some polling centers before their open. Venezuela uses an electronic, fingerprint vote system. Most observers believe that Capriles would be a better friend to the U.S. than Chavez has been, but the point proved to be moot when President Chavez won the election. His win was by the smallest margin since he first was sworn in as president in 1999. Questions remain about his health and a successor should his cancer return.

This weekend, other geopolitical events drew attention. Turkey fired artillery across Syria's border in response to a Syrian shell that landed in Turkey. In Libya, the newly elected Prime Minister Mustafa Abushagur lost his job in a no-confidence vote. He could not produce a list of cabinet members that met with the approval of the assembly. His list did not include candidates from the liberal National Forces Alliance and was deemed by some in his country not representative of the country.

Let's look at daily charts.


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:

Friday, the SPX sprang higher along with many other indices, but prices were knocked soundly back from that morning high. A long upper long candle wick or shadow like the one formed Friday suggests further downside the next trading day, and that's what we saw today.

The SPX pulled back but found support on the daily close at the 9-ema. Barely. A test of the bottom of the SPX's rising regression channel still seems possible. Continued small-bodied candles and closes above the 9-ema will lessen the chance of that happening before another rally attempt.

The chart provides a vivid picture of prices caught between competing support and resistance levels. Until the SPX can form consistent daily closes back above about 1462 or consistent daily closes below about 1450-1452, we won't know what to expect next. We won't know whether the SPX is more likely to head up to another retest of the 1470-1475 level and then, perhaps, eventually to the top of its rising regression channel, or down to the bottom of its rising regression channel.

Although last week I thought a retest of the bottom of the channel seemed most likely, continued small-bodied candles moving sideways now will lessen that likelihood. If Friday's action was as bearish as it appeared to be, we should see a steep decline sometime this week. Note that although Friday did see a steep climb in the morning, it's what happens by the close that matters most except for those in very short-term trades. Friday's action proved resistance was strong rather than suggested that it wasn't. However, sideways action all week would render that candle less relevant.

Make no mistake. Even strong rallies require a return to test support levels now and then. The SPX will return to test the bottom of this channel at some point. Whether it's before a resistance test or after is the question, and we don't know the answer to that yet. Today was a consolidation day, a wait-out-the-European-meeting-and-the-beginning-of-earnings-season day.

Further potential targets are marked in case support or resistance fails.

Annotated Daily Chart of the Dow:

On a Keltner basis the Dow outperformed the SPX today, and it did so with confirming outperformance by the Dow Jones Transportation Index. The Dow Jones Utilities, another sister index to the Dow, also held steady. The Dow did not pull back all the way to its 9-ema today. Its candle can be described as one depicting a continued challenge of the overhead resistance.

Still, the Dow did not break out on today's close much less on consistent daily closes, above that resistance. The Dow remains as trapped as the SPX is between support and resistance. Consistent daily closes above about 13630 suggest a move to challenge Friday's morning high, and, if that challenge is successful, to challenge the top of the Dow's rising regression channel.

Consistent daily closes beneath the red 9-ema suggest a decline to the bottom of the rising regression channel. Although last week, the setup favored a decline to the bottom of the channel, continued sideways movements like today's lessen the likelihood that the decline will occur before a rally attempt.

Annotated Daily Chart of the NDX:

As has been true the last several weeks, the NDX underperformed the other two indices on a Keltner basis. The NDX gapped below the red 9-ema and headed down toward the middle of its former rising regression channel, where Keltner and historical support also group.

The NDX is in danger of doing what AAPL did today: gapping or moving sharply beneath key support. It's possible for technicians to argue exactly where that key support lies, but it may be anywhere in the 2768-2780 range. Such a violation for more than a few minutes could quickly drop the NDX to 2750 at least and maybe as low as the bottom of its former rising regression channel.

If the NDX finds support and rises instead, watch for potential resistance on daily closes at the red 9-ema and then at 2800-2860. Keep AAPL on your radar screen if you're trading NDX options.

Other potential targets are marked on the chart.

Annotated Daily Chart of the RUT:

As noted on the chart, RUT prices cling to the midline of the rising regression channel in which RUT prices have been traveling. A drop through that midline, especially on a daily close, might mean a fast trip down toward 830. A strong bounce from the midline, especially one that clears the red 9-ema on daily closes, heightens the chance that the RUT will climb back toward 850-855, where it should again face potential resistance.

Further-out potential targets are marked on the chart.

Tomorrow's Economic and Earnings Releases

Jim Brown covered German Chancellor's Angela Merkel's anticipated visit tomorrow to Greece in this weekend's newsletter. As he mentioned, many in Greece blame Chancellor Merkel's government for imposing strict austerity measures, and they in some cases express personality animosity against Chancellor Merkel. The visit conveys Chancellor Merkel's approval of the efforts made by Prime Minister Antonis Samaras since his election, but the situation will be strained. Undercover agents, plainclothes police, snipers, commandos and others are moving into place to protect the German chancellor during her visit. Today, pensioners took to the streets in Greece to protest austerity measures, and various protests and strikes are planned for her visit.

Alcoa (AA) kicks off the earnings season tomorrow after the close. AA's report may give insight into global conditions, some analysts believe. AA will be joined in the earnings parade by YUM Brands (YUM), also reporting after the close. YUM should give insight into consumer spending both in the U.S. and globally. Analysts will want to see how same-store sales are performing in China.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Most times, prices tend to stay within the boundaries of the middle Keltner channel, the one described by the purple channel lines. You can see, of course, that they haven't always done so, with Friday's big morning move being one example of a time when the channel's boundary was breached. If no big surprises hit out of Europe, China or some U.S. company's guidance, most 30-minute closes tomorrow could be expected to be at or above 1448-1450 or below 1465-1467. If we see the SPX with consistent 30-minute closes above or below those levels, we have to consider the possibility that the next targets in that direction will be approached.

What about within that 1450-1465 range? What is most likely to happen first thing tomorrow morning? I'll tell you what the chart favors, but that doesn't mean that will happen. There are many hours between now and then and at least 27 finance ministers meeting who can change everything about the outlook. If the SPX should jump up above 1460 and maintain 30-minute closes above that level beyond the first 90 minutes or so, the chart favors a climb toward 1465. In any other scenario, it favors a retest of today's low and maybe of 1450. The setup doesn't guarantee that's what will happen, but that's what this setup would suggest in times when trading isn't so driven by headlines.

The chart does not suggest what will happen if either 1450 or 1465 is tested, although it does give a slight nod toward the probability that a 1450 support test would fail. However, that's the object of such a test, to determine if resistance or support can be broken.

Annotated 30-Minute Chart of the Dow:

Similar setup on the Dow. Under normal conditions, you would expect thirty-minute closes for at least the first few hours tomorrow to be encompassed within a range from about 13505-13510 and 13640-13645. If, early tomorrow, the Dow can maintain 30-minute closes above about 13610, the test of 13645 looks more likely. Thirty-minute closes below about 13574 suggest that the Dow will head toward 13540 and maybe even 13505.

Further-out potential targets are marked in case the Dow should break outside that purple central channel.

Annotated 30-Minute Chart of the NDX:

The NDX did break out of that central purple channel today, forming consistent 30-minute closes beneath that lower purple channel's boundary. However, with last Tuesday's swing low below it, the NDX steadied, with prices moving up inside the channel again by the close. This looks like a case of the NDX's gap lower simply overrunning channel boundaries, as both the NDX and RUT often do. If the NDX were to open lower again tomorrow morning, however, or drop quickly below today's low, that "just overran the boundary" theory is undone, and a potential downside target near 2760 must be considered a possibility.

If the NDX climbs, suspect potential resistance on 30-minute closes near 2805-2812, if not before. If in bullish short-term trades, make plans for how you'll protect those profits if the NDX should approach those levels, just in case. Next targets are marked in case the NDX should clear subsequent resistance levels on 30-minute closes.

Annotated 30-Minute Chart of the Russell 2000:

In normal circumstances, the RUT would be likely close most 30-minute periods in early trading tomorrow between about 836-837 and 846-847. Consistent 30-minute closes tomorrow morning above 839.50-840 would suggest that 841-842 would be likely to be tested with likely strong resistance there since it's also joined by historical resistance in that area. If the RUT should push above that 841-842 zone in consistent 30-minute closes or gap above it and not immediately reverse tomorrow morning, then an 846-847 test might be anticipated. If the RUT instead moves lower tomorrow morning, another test of today's low down to about 836 might be anticipated.

Further potential targets are marked on the charts if the RUT breaks through about 836 on the downside, on consistent 30-minute closes, or above 847, on consistent 30-minute closes.

Last week, I thought it was time for the indices to pull back further, just as a matter of routine, to test the lower boundaries of their smallest Keltner channels (grey) or even the lower boundaries of their rising regression channel. The chart setups favored the "sooner rather than later" scenario.

I said I hadn't been convinced by last Monday's rally but that I could be convinced by consistent daily closes above the 9-ema, and provided potential upside targets should the indices climb sustain daily closes above their 9-emas. Indices did produce daily closes above their 9-ema's although "sustain" is too strong a word. Many did reach for their next targets, where potential resistance was converted to very real resistance. I rechecked last week's article to make sure that I had adequately marked those potential targets in case the decline scenario was proven wrong, as it was.

Now what? We could have double tops forming on some indices. To erase that specter, those indices need to break out to the upside, and the sooner, the better. However, the picture is more clouded than it was last week. I've pointed out some levels to watch on the charts.