Market Internals


Unlike many Mondays, today's dance card of economic releases proved full, although the dance at first didn't look to be a success. Shy dance partners were reluctant to move onto the dance floor until they could tell what kind of music the band was going to be playing. By the end of the day, most were on the floor enjoying themselves. The SPX gained 0.81 percent; the Dow, 0.72 percent; the NDX, 0.73 percent; and the RUT 0.63 percent.

The SOX gained 1.48 percent, more than most of the broader indices. The RLX, the S&P Retail Index, also posted strong gains of 0.96 percent. Health care stocks outperformed, with many drug manufacturers showing strong gains. Telecoms underperformed. Gold was weak.

Monday's Developments

Overnight, many Asian bourses climbed out of negative beginnings into positive territory by their closes. The Nikkei 225 started off in negative territory, climbed into an afternoon high, then slipped off that high the rest of the afternoon. The Nikkei 225 still managed a positive close, up 0.51 percent. The Hang Seng gained 0.06 percent, and the Straits Times 0.04 percent. However, the Shanghai Composite dropped 0.30 percent.

Many Asian indices had started off weak. About the time East Coast residents here in the U.S. were settling down for the night last night, China released economic numbers that left room for easing. Consumer prices rose 1.9 percent, in line with expectations, while producers' prices dropped 3.6 percent.

Many Asian bourses moved into positive territory at that point, just as our indices tend to bounce when there's hope of easing. The indices didn't hold at their highs, however. China's next economic releases, trade surplus and money supply, both were greater than expectations, questioning how much room there might be for easing after all.

By this morning, when East Coasters were probably waking, that combination of economic releases had been recast as "mixed signals" and blamed for the pullbacks from afternoon highs in many Asian indices. Of course, if charts are closely examined, that facile explanation might not be telling the whole truth.

For example, the Nikkei 225's chart reveals that the afternoon high tested resistance that has held for the last several trading days. The late-afternoon decline off the day's high was a pullback from that resistance zone. Furthermore, Japan's Revised Industrial Production surprised to the downside just as that resistance was being tested. That number measured -1.6 percent rather than the expected -1.3 percent.

Technical reasons and fundamental reasons perhaps converged across Asia. The mixture of signals did not allow enough confidence to push through that resistance that had held for days. The influences on the various markets proved a little more complicated than some articles suggested.

Market participants on European bourses felt no confusion about direction in early trading. European bourses charged higher in that early trading period. However, they, too, suffered an afternoon decline off their highs. In their case, early weakness in U.S. bourses was blamed. However, when 5-day charts are examined, we see the DAX, for example, approaching a resistance zone near 7300 at the day's high and pulling back from that when market participants just weren't able to break it through that resistance.

Again, the story was more complicated than it first appeared, with a confluence of technical and fundamental reasons for the market behavior. The story seemed fairly consistent, however, with indices bouncing but not quite having the strength to push through resistance, and then pulling back.

The FTSE 100 gained 0.28 percent, and the DAX, 0.39 percent. The CAC 40 rose 0.92 percent, while Spain's IBEX 35 closed higher by 0.34 percent after spending some time in negative territory during the afternoon's trading before an end-of-day bounce. Yields on Spanish 10-year notes rose 0.19300, to 5.81500. On 10/09, they had closed at 5.763 but had been tumbling lower since then, with that move reversed today.

Headlines concerning Greece, Spain and the broader 27-nation European Union countries continued to roll off the presses today. For example, the Telegraph reported that the International Monetary Fund had warned the U.K.'s Chancellor George Osborne that austerity measures may be cutting too deeply and may be damaging the economy. The Bank of England should also be more "inventive," the IMF's David Lipton, Deputy Managing Director, warned.

Lipton wasn't the only representative of the IMF speaking out today. The IMF's Managing Director, Christine Lagarde, urged eurozone officials to put into effects its bailout funds and bond-buying programs. You know the rest of this paragraph: EU officials say they're ready, but sovereign countries have to officially request the help and agree to conditions . . . and you can fill in the rest.

The U.S. pre-market dance card filled up quickly this morning, but it actually began filling up overnight. FOMC Chairman Ben Bernanke countered criticism from China and Brazil that the current stimulatory policy hurt emerging countries by saying they brought some of the impact on themselves. In what Reuters termed a "blunt" statement, he asserted that if emerging countries let their currencies rise, they would be afforded some insulation from external pressures. "You can't have one without the other," he reportedly stated, linking undervaluation and unwanted capital inflows ("Bernanke defends Fed stimulus as China, Brazil raise concerns").

FOMC voting member William Dudley, president of the Federal Reserve Bank of New York, spoke early this morning to the National Association of Business Economists. In his speech, titled, "Intersection between Finance and Real Activity," President Dudley denied the existence of a bond bubble. He reiterated the FOMC stance that the yields would be kept low beyond the initial improvement of the labor market. Yields would remain low until the FOMC feels that the labor market outlook has stabilized. He refused to speculate on the fiscal cliff.

The Census Bureau reported on retail and core retail sales during that pre-market session, too. Analysts predicted gains in both numbers, but a slight slowing of gains. They called for 0.7-percent and 0.6-percent gains, respectively, with prior gains at 0.9 percent and 0.8 percent. Core retail sales exclude automobiles.

Both numbers exceeded expectations by a large margin, at 1.1-percent gains for each. Moreover, the prior numbers were ratcheted higher, to 1.2 percent for the headline number and 1.0 percent for core retail sales. Headline sales were 4.8 percent above the year-ago level, and core sales were 5.4 percent higher.

The report also noted that the increase seemed to take place across most categories, with department stores being the exception. Stores selling appliances and electronics gained the most, probably courtesy of the iPhone, some speculated. Although high gasoline costs certainly contributed, that increase was smaller than it had been in August, and sales without fuel included still gained 1.0 percent.

The next partner on the dance card stepped on the pre-open rally's feet, and that rally stumbled before getting its footing again about an hour into trading. The Federal Reserve Bank of New York reported the Empire State Manufacturing Index, with this diffusion index expected to rise to a -4.5 from the prior -10.4. Instead, the diffusion index measured -6.2. Negative numbers can be confusing to some, but the report showed that while the general business conditions index actually rose almost four points (from -10.4 to -6.2), it still remained negative for the third consecutive month. Employment conditions weakened, but the six-month outlook improved.

The Census Bureau reported Business Inventories at 10:00 am. Analysts forecast a 0.5-percent rise, a slower rise than the prior 0.8-percent climb. Inventories for August instead rose 0.6 percent, ahead of predictions but well below the prior rise. Coupled with the strength shown by the retail sales numbers, a slowing of gains in inventories may be deemed a good thing. Any pickup in sales will necessitate a pickup in production, if inventories are leaner. Of course, businesses may just be hesitant to fully stock shelves.

Fed speakers weren't yet through for the day. At 12:45 pm, Federal Reserve Bank of Richmond President Jeffrey Lacker spoke before the Business and Government Leaders meeting in Roanoke. President Lacker is a current voting member. President Lacker talked about what monetary policy can and cannot do. He pointed to the fact that "over the last 20 years, inflation has averaged 2.05 percent per year," contrasting that to the 1970s, when inflation was at double-digit rates at times. He believes this stability is "fundamentally attributable" to the actions of the FOMC.

Then he moved into a discussion of the labor market indicators such as the rate of job growth. He pointed to the fallacy of picking this as "prima facie evidence that the Fed is failing to promote effectively the goal of maximum employment."

Monetary policy can't do it all, he said, and he thought "maximum employment" should be defined in terms of the maximum level of employment that a central bank can effect, given other, outside pressures. He enumerated many of those pressures, including the current uncertainty relating to Europe and our fiscal cliff. It is his belief that growth will "firm later next year and continue to improve after that."

He explained his dissent at all six FOMC meetings this year with respect to the forward guidance issues. He doesn't like the part of the statement that mentions that "economic conditions are likely to warrant a federal funds rate near zero for at least several years." He believes that statement can be misinterpreted in a way that dampens expectations. He doesn't like the purchase of agency mortgage-backed securities. He prefers the purchase of Treasury securities.

Story stocks today included Japan's Softbank and Sprint Nextel Corp. (S, 5.69, down 0.04 or 0.70 percent). Softbank wants to trade $20 billion for a 70-percent stake in Sprint. The offer will be split into an $8 billion portion of shares bought directly from Sprint and a $12 billion portion purchased directly from existing share holders. Shares are expected to be purchased at $7.30, well above Friday's close at $5.73. Articles tag this as a "gamble" for Softbank.

The $8 billion portion will be further subdivided with $3 billion spent on a convertible bond with an exercise price of $5.25. Sprint will use that money to buy the portion of Clearwire that it hasn't yet obtained, a 52-percent stake, although no deal was due to be announced today.

If you're a Kindle user, you probably received an email from Amazon (AMZN, 244.18, up 1.82 or 0.75 percent) this weekend, alerting you that you might be receiving a credit of $0.30 to $1.32 for each Kindle book you purchased from April 2010 to May 2012. This is part of a settlement in an antitrust lawsuit with Hachette, Harper Collins and Simon & Schuster. In Amazon's words, "We think these settlements are a big win for customers and look forward to lowering prices on more Kindle books in the future."

Some M&A speculation also focused on AMZN. Israeli newspaper Calcalist said that AMZN has been talking to Texas Instruments (TXN, 28.22, up 0.94 or 3.45 percent) about buying that company's mobile chip business. The Kindle Fire employs a TI processor. A purchase of the mobile chip business could mean that AMZN intends to move beyond mobile devices such as the Kindle products currently sold or in development.

Morgan Stanley (MS, 17.75, up 0.44 or 2.54 percent) made the list of story stocks today. A suit alleges that MS discriminated against minority buyers, charging them higher rates. WFC has already settled a suit charging bias.

Microsoft (MSFT, 29.51, up 0.31 or 1.06 percent) revealed more details about the launch of XBox Music. MSFT plans to offer a range of services, including free streaming of any song included in its library to any device employing Windows 8. For a subscription price of $9.99/month, the interested user can get rid of the ads and can download music to be listened to offline. MSFT's launch includes a Music store and a "Smart DJ" service which allows the user to create custom playlists. MSFT seems to be aiming for customers who use their Xbox to stream video rather than just play games. Analysts were mixed in their opinions of how successful the MSFT entry into the already established Pandora/iTune/AMZN space would be.

Companies reporting earnings included Citigroup (C, 36.66, up 1.91 or 5.50 percent). As anticipated, charges related to C's stake in its brokerage joint venture and its debt hit revenue, driving revenue 33 percent lower than the year-ago level. Excluding those charges, C's earnings would have been $1.06 a share on $19.4 billion revenue. Analysts had anticipated $0.96 a share on revenue of $18.72 billion. CEO Vikram Pandit credited momentum in the core businesses for producing a strong quarter. The mortgage business in the U.S. and lending in Latin America showed strength, the company reported.

Charles Schwab (SCHW, 13.03, up 0.08 or 0.62 percent) also reported earnings. Despite a slowdown in trading activity, the company reported earnings of $0.19 a share on revenue of $1.2 billion. Analysts had anticipated $0.17 a share on revenue of $1.2 billion. Higher asset management fees and lower money-market fee waivers helped the company overcome a decline of 18 percent in the company's trading business revenue.

The company also announced that it would buy ThomasPartners Inc., an asset-management firm focused on dividend income. It would pay $85 million in cash, and would possibly pay more contingent upon future growth in the assets being managed.

Media and market solutions company Gannett Co. (GCI, 17.85, down 0.05 or 0.28 percent) reported Q3 earnings of $0.56 and revenues of $1.31 billion, versus expectations of $0.53 and revenues of $1.29. The company mentioned their efforts to benefit from Olympic and political spending in the broadcasting segment. They also praised the rollout of their "new, all access content subscription model" for growing circulation revenue.

Wynn Resorts (WYNN, 116.25, up 2.44 or 2.44 percent) was due to report today, too. The time was not supplied, and their report did not appear on standard news sources at the time this report was prepared.

Is the dance party over? Late in the day, hedge fund consultant and author of The Belkin Report, Michael Belkin, joined the doom-and-gloomers we've been hearing from lately. He says that the U.S. is entering a recession, and that the stock market will drop 40 percent over the next 12-15 months. It's not our fault, though, as he says the recession is being "transmitted into the U.S." via Europe. We'll see disappointing earnings, he warns, particularly with tech companies.

Let's look at the daily charts. They'll display some important breaks of support that need to be quickly reversed or lower targets will be reinforced.


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:

After dropping to test the lower boundary of its rising regression channel, the SPX broke through the support Friday and closed below it, too. A one-day break can be an aberration. However, that action also confirmed a double-top formation when the SPX dropped below and closed below the 1430.53 valley between the two peaks. The SPX also began a pattern of daily closes beneath a descending red 9-ema. All this evidence leans toward the bearish side.

The SPX did, however, find support on daily closes at its flattening 45-ema. For the moment, that prevented the SPX from setting its next downside Keltner target, now near 1390-1395. However, the double-top's projected downside target, a supposedly "confirmed' target, is at 1386.55, if I didn't fat-finger the calculations. Market participants must begin to factor in a possible drop to test 1395-1400 and possibly lower levels.

Declines tend to happen sharply, so such a decline could occur in short order. For today, it was certainly time for the SPX to retest that 9-ema. Now the SPX appears to be trapped between resistance at the 9-ema and support at the 45-ema. Any bounce that consistently clears the red 9-ema on daily closes could result in a rally, perhaps all the way up to 1456-1460. It wouldn't be until and unless the SPX could consistently produce daily closes above the midline of that rising regression channel that I would feel comfortable that the bearishness of the recent action had been completely undone, however. Until that happens, a rally is just a rally to test resistance.

SPX traders are in a peculiar spot right now. They need to defend against a possible steep decline toward 1395-1400 or an equally quick rush up toward 1456-1460. Today's failure to close above the 9-ema heightens the sense that this average now serves as strong resistance, but a morning gap tomorrow could erase that conclusion. Later in the article, we'll look at intraday charts and see if they verify this outlook.

Annotated Daily Chart of the Dow:

The Dow's setup appears similar. The Dow also balances on daily closes on the support of the 45-ema, not quite setting a downside Keltner target of 13000-13025, but Friday, it also confirmed a double-top formation. That confirmation set a potential downside target of 13072.67, if I haven't fat-fingered the calculations.

The setup is the same here: a loss of support of the 45-ema sets that potential downside Keltner target. Consistent daily closes back above the 9-ema and the bottom of that former climbing regression channel sets a potential upside target near 13650, but today, the resistance at the 9-ema held when tested. Either move could be sharp. Not until the Dow consistently closes above the midline of its rising regression channel would I consider the bearish potential completely undone.

Annotated Daily Chart of the NDX:

The NDX setup proves a little different: instead of a double-top formation, the NDX was building a roughly shaped head-and-shoulders formation, which it did confirm. As should be true of bearish confirmations, the NDX dropped hard after its confirmation. The failure of the SPX and Dow to drop as sharply after their supposed confirmations of their double-top formations is one reason I'm not all-out bearish for the near term. I'm officially confused for the near term with a slight bearish cast.

The NDX dropped to and a little through its rising regression channel's support. It dropped through its 45-ema, the peach-colored moving average on this chart. As is quickly apparent from a scan of this chart, the NDX's behavior isn't particularly coherent with respect to that average. A break like the NDX's would normally have set a potential Keltner target of about 2680-2700. The NDX did reach a low of 2713.22 today. Is that close enough?

I would not yet rule out further declines, at least to 2700 and perhaps below. Those could come immediately or only after a retest of the resistance grouping from about 2750-2770. If the NDX can make it past that resistance through daily closes, then the next upside target set is near 2790-2800. Further upside potential targets are marked on the chart.

Annotated Daily Chart of the RUT:

The RUT's chart proves particularly interesting. The RUT did confirm a downside target of about 802-810. It has formed a pattern of daily closes beneath the 9-ema, but today it rose right back up to challenge that (red) moving average's resistance. Consistent daily closes above that moving average resets the target, up toward 840-845, but a rollover here maintains the lower 802-810 target. Further potential targets are marked on the chart.

In the past, an examination of the dollar, the Dow Jones Utilities, or the Retail or Home Builders' indices might have occupied this next space in the Wrap, but now it's AAPL we often use as a measure of market strength or weakness.

Annotated Daily Chart of AAPL:

While painful for bears and bulls to endure, it appears that swings between the two marked rectangles constitute chop without predicting much about what happens next to AAPL's price or to its influence on the indices. AAPL needs to break through the resistance offered in the top zone or the support in the bottom one before we know much about near-term strength or resistance.

Tomorrow's Economic and Earnings Releases

Two economic calendars have the FOMC's John Williams speaking before the Financial Women's Association in San Francisco, in a speech titled "A Perspective on the Economy" on differing nights. One says that speech occurs tonight; another, tomorrow night, as I've indicated on the graphic. I don't know which is correct, but it's doubtful he'll be delivering the same speech at the same conference two nights in a row. He is a 2012 voting member, so his comments might draw press attention, whichever night he presents.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

This chart confirms the importance of the overhead resistance at the nearest green rectangle, resistance that the SPX charged up to test at the close. This level approximates the overhead resistance seen on the daily chart, too, as does the potential upside target if the SPX should manage consistent 30-minute closes above that resistance.

If the SPX should gap above or power above that resistance in early trading tomorrow and not reverse within a couple of hours, traders could consider that potential upside target set. That next potential target is marked on the chart.

If the SPX slips lower instead, potential support levels lie in fairly regular intervals of 4-5 points. However, those channels in which the SPX travels slanted down until they began flattening this afternoon. Potential support levels will decline further with a strong push lower, too.

A sustained move below 1420-1422 would constitute a breakdown, a momentum move that requires looking to the daily chart for potential next targets.

Annotated 30-Minute Chart of the Dow:

Potential resistance appears to be bunching up at the nearest green rectangle; support, at the orange one. That resistance was tested at the close as the Dow pushed higher at the end of the day. Consistent 30-minute closes above resistance set the next upside target marked at the highest green rectangle. Consistent 30-minute closes beneath next support target the top red rectangle. Remember that these channels will be pushed lower by a steep decline. Moreover, any drop on consistent 30-minute closes below about 13250 constitutes a breakdown out of the channels, a momentum move that requires looking to the daily chart for next potential targets.

Annotated 30-Minute Chart of the NDX:

At the close, the NDX looked set up to challenge the next resistance at the nearby green rectangle, roughly corresponding to the 9-ema on the daily chart, although perhaps not before a retest of support to see if that holds. Consistent 30-minute closes above that resistance at the nearest green rectangle set the next upside target. If the NDX should instead drop below the support marked at the orange rectangle on consistent 30-minute closes, next potential support levels are marked.

The NDX's outer Keltner channels still slanted downwards until they began flattening this afternoon. Potential support will be pushed even lower by a steep or quick decline when the channels already are inclined to slip lower. Consistent 30-minute closes beneath 2700-2710 constitute a breakdown out of the intraday 30-minute channels, a momentum movement that could gain some steam. Look to the daily chart for next potential support in that case.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's setup is similar to the NDX's. If the RUT rises to challenge the next resistance marked at the nearest green rectangle, be aware of rollover potential. If the RUT can maintain consistent 30-minute closes above that resistance at the nearest green rectangle, the next upside target is marked. If the RUT drops lower tomorrow and breaks through support at the orange rectangle, potential support is marked, too. Those channels still slant lower, although they were beginning to flatten near the close, but will be pushed lower again by any decline. Consistent 30-minute closes below about 818-820 will constitute a breakdown of out of the intraday 30-minute channels, and the potential support levels marked on the daily chart should be watched next.

What do I think? I'm struggling with this one. The two-candle patterns from Friday and today suggest that prices will continue to batter at resistance in the form of their former rising regression channels and descending 9-ema's. But will market participants be any quicker to buy than they were today, when none of the indices broke through that resistance? The RUT, in particular, looks as if a fairly firm downside target has been set. The NDX looks as if it was not only set but very nearly already reached, so that it predicts that such targets can be met.

The SPX and Dow are harder to read. If I were to endow them with voices, they'd be saying, "Oops, I didn't realize I stepped out of bounds, and I'm correcting that unintentional mistake right now. All I intended to do was follow form and pull back within this channel in which I've been traveling." Yet, they did not produce a convincing break of resistance. It held.

Tomorrow's premarket economic and earnings reports could tell the tale. Some economic reports are coming in better than expected. Many risks remain.