Market Internals


I, for one, am glad to get all the "25th anniversary of the 1987 crash" headlines behind us. Although 1987's crash occurred on October 19, not October 22, the term "Black Monday" is so ingrained in our lexicon that those stories and headlines continued through to today. Friday's decline resulted in hyped-up fears that today's trading would produce another epic decline like that one.

In the week heading into the anniversary, analysts showered investors and traders with predictions of disastrous declines. Sharp declines were predicted for the next few months, the next year or, in one case, at least in the next 79 years. That 79 years comes from a report that crashes like the 1987 one have occurred throughout our stock market's history about every 104 years ("A Theory of Large Fluctuations in Stock Market Activity," H. Eugene Stanley, Parameswaran Gopikrishnan, and Vasiliki Plerou). Doing the math, 104-25 = 79, predicting that we're due for another crash sometime during the next 79 years. Unfortunately, the Mark Hulbert article repackaging this research with more recent warnings wasn't titled, "Market Crash Will Likely Occur Any Time in Next 79 Years." It was titled, "Another stock crash like 1987's is inevitable," a little more fear-inducing and immediate-sounding that my suggestion for a headline.

Of course, we know that "on average" can include two crashes that occur in much closer succession, such as two that occur 25 years apart. We know that markets currently face severe challenges. I'm just trying to put some perspective on the fear-based statements raining down on our heads these days. By all means, react to the environment in which you're trading. Scale back trades if you feel that the risk is too large, hedge if you've got substantial monies at stake, and investigate collaring or other techniques for your own long-term portfolios. But don't spend so much on puts that you overwhelm your trades and have no prospect of profitability. Take a deep breath and make appropriate plans, whatever they might be. Then sleep well.

We certainly started with a weak Monday, but not one that felt like a black one. Many indices recovered to positive territory by the close, courtesy of the end-of-day jump. The SPX gained 0.04 percent; the Dow, 0.02 percent; and the NDX, 0.61 percent. The RUT, however, lost 0.06 percent. The transports closed lower by 0.35 percent.

Crude and natural gas slipped, but natural gas prices first hit a new high before tumbling into the close. Crude futures had an expiration today, so some action can likely be attributed to that although the CME Group's report also points to CAT's earnings guidance as contributing to the weakness in crude futures.

Homebuilders, as measured by the Dow Jones Home Construction Index ($DJUSHB) had been strong, reaching a new recent high Friday morning and then attempting to best that high this morning before ending up with a doji day, a small-bodied candle indicative of indecision. Retailers (RLX) dropped heavily, but bounced off its low while remaining negative on the day. The BIX and BKX dropped to or toward last week's lows, but their EOD bounce produced flat closes for both.

That Whew! could just as easily reference the just-about-concluded discussions among Eurogroup members after last week's meetings of finance ministers. A spokesperson announced this morning that discussions with Greek authorities were effectively down to the details on fiscal and structural measures. The spokesperson denied that an emergency meeting is being set up to deal with the next tranche of aid to Greece. Reportedly, the next tranche will not be released until the Troika report on Greece is released. That's been postponed several times, and last week was reportedly delayed again, until November, although specific dates are hard to determine or trust, once provided. I would suggest that all traders be aware that the report could come at any time and could impact global markets, although the way in which they could impact them would of course depend on what the report says.

The EU Commission spokesperson announced that no further meetings are scheduled before mid-November. Those meetings tend to be preceded, accompanied, and immediately followed by headlines that churn global markets. It would be nice to have a bit of a break, although that's perhaps too much to expect.

Monday's Developments

No Monday report is complete without at least a brief report of weekend geopolitical developments. Those developments included renewed violence in Beirut after the funeral of an assassinated intelligence official. Protesters allegedly blame the assassination on Syria. Both U.S. and Iranian officials denied that the two countries have secretly agreed on one-on-one discussions about Iran's nuclear program.

When reported last night, Japan's trade deficit was much deeper than anticipated. Whether in reaction to their own report, our weakness Friday or a combination of the two, the Nikkei 225 and other Asian bourses started out in negative territory. By the close, however, the Nikkei 225 had managed a barely positive close, up 0.09 percent. The Hang Seng gained 0.68 percent; the Straits Times climbed well off its opening low but still closed lower by 0.11 percent; and the Shanghai Composite rose 0.21 percent. The yen had weakened against the dollar due to the deficit report. Reports from Asia note that the Hong Kong Monetary Authority intervened in the currency markets Friday to weaken the Hong Kong dollar, with that effort perhaps not as successful as the authority might have hoped.

Europe's pattern was different. European bourses also began in negative territory and soon climbed into positive territory, like the Asian bourses, but the European bourses typically watched in this report couldn't hold in positive territory. Certainly, our weak first few hours could not have helped support prices. In Europe, the FTSE 100 ended lower by 0.22 percent; the DAX, by 0.71 percent; and CAC 40, by 0.61 percent.

Spain's IBEX 35 declined 0.46 percent. A weekend election solidified Prime Minister Rajoy's majority. Some pundits believe that victory will make it easier for the prime minister to request bailout funds, if necessary, but Spain may still be stringing out that request, hoping that the decline of yields on the Spanish 10-year treasury since July's 7.62-percent high will obviate the need to ask for help. Those yields ended at 5.495 percent today, up 0.123 from Friday's closing yield.

Story stocks opened the day today, with news that British energy company BP (42.65, down 0.45 or 1.04 percent) will sell its 50-percent position in TNK-BP to the Russian state oil company Rosneft. In return, BP will receive a $17.1 billion in cash and the remainder in Rosneft shares. In addition, BP will buy a 5.7-percent position in Rosneft for $4.8 billion, bringing its stake in Rosneft to 19.75 percent. BP would also take two seats on the board.

While the TNK-BP joint venture has brought BP big profits, TNK-BP executives feel that it owns mostly older oil fields that have little new output potential. Others disagree. Certainly Rosneft officials believe this move to be one that strengthens Rosneft's march toward becoming the world's largest publicly traded oil company. Jim Brown's take on the situation will be welcome when he returns to writing Wraps.

Another story occurred in the energy sector. Ottawa today nixed Petronas's takeover of Progress Energy Resources Corp., saying that Petronas did not pass the "net benefit" test.

Starbucks' (SBUX, 45.30, down 0.39 or 0.84 percent) Chief Executive wants you--and, more importantly, the UK public and politicians--to know why it paid so little in corporate income taxes in the U.K. Although the company reported $4.8 billion (US equivalent) in sales since 1998, it paid only $13.7 million in corporate taxes. That's because the company has made significant investments in the U.K., and so hasn't been profitable, the chief executive said. However, they have paid, "over 160 million pounds in taxes, in VAT (value added tax), in insurance, in real estate taxes" (Ellyatt, Holly, "UK Tax Story 'Sensationalized').

Reporting companies today included Caterpillar (CAT, 85.08, up 1.22 or 1.45 percent), reporting before the bell. The company's profit of $2.54/share was produced on revenue of $16.45 billion. That beat per-share expectations of $2.21, but the revenue was shy of the anticipated $16.6 billion. CAT guided full-year expectations to $9.00-9.25 a share on revenue of $66 billion, well below the previous guidance of $9.60 a share on revenue of $68-70 billion. CAT pegged the disappointing guidance on "global economic conditions that are weaker than we had previously expected." The good news in that report was that sales in the U.S. were stronger and the company was able to institute price increases. Also, those profits of $2.54 per share were 48.54 percent higher than the year-ago figure of $1.71 per share. Whether the bad news was already baked into the stock price or the good news was deemed more important, the stock rose after an initial sharp decline.

Early morning reporting companies included such diverse companies as Peabody Energy (BTU, 28.95, up 3.06 or 11.82 percent), SunTrust Banks Inc. (STI, 27.67, down 0.96 or 3.35 percent) and toymaker Hasbro (HAS, 38.39, down 0.66 or 1.69 percent). BTU's earnings of $0.51/share were $0.17 ahead of expectations of some analysts. Unlike some other companies, BTU issued in-line FY 2012 guidance rather than guiding lower, even though BTU also mentioned "constrained" global macroeconomic conditions. In particular, the company mentioned the recession in Europe, a slowly growing U.S. economy and a deceleration in China's growth.

Since September, SunTrust Banks has been engaged in a number of efforts to strengthen the company, including adding to set-asides, exiting previous agreements, and moving delinquent loans to loans for sale. The company reported $1.98/share earnings, with expectations ranging from $1.86-1.99/share, depending on the source viewed. Total revenue climbed to $3.84 billion, but fell to $1.9 billion when the securities impacts were removed.

HAS apparently hit its stride on some categories such as girls' toys but missed on others, such as boys' and preschoolers' toys. Some of that miss on product mix had been expected, as "Transformers" and "Beyblade" product sales were expected to decline. Profit was $1.28/share, excluding the foreign currency impact, on revenue of $1.35. Expectations had been $1.20/share on revenue of $1.38 billion.

Tech stock Texas Instruments (TXN, 27.79, down 0.02 or 0.07 percent) also reported. Earnings were $0.67/share on revenue of $3.39 billion, two percent lower than the year-ago revenue. Analysts had anticipated $0.26 a share on revenue of $3.3 billion. However, the $0.67/share figure included a charge of $0.07 a share and a benefit of $0.22/share, so that we may not be comparing apples to apples. As this report was prepared, the stock was up to $28.00, up $0.21 from its closing value. The company's CEO said that both the economy and the semiconductor market had been weak and "likely will get weaker in the fourth quarter (CNBC with Reuters).

The big report everyone awaited this afternoon was Yahoo's (YHOO, 15.77, down 0.07 or 0.44 percent). As this report is prepared, investors and traders were sending the stock higher another $0.49 to $16.26 in after-hours trading. This quarter is the first full quarter under CEO Marissa Mayer. The company reported $1.09 billion in revenue, with traffic acquisition costs excluded, when analysts had anticipated $1.08. Adjusted per share earnings were reported at $0.35 when analysts had expected those adjusted earnings to come in at $0.25. Net revenue was higher than the year-ago level. However, the early reaction may not be the overnight or trading-day reaction. Much will depend on the results of the conference call, as analysts will want to know what Mayer plans to do about smartphone offerings and declining activity on many sites and then digest that information. The company reported a $2.8 billion gain related to the sale of Alibaba Group shares. Initial reports from the conference call pointed to YHOO's efforts to improve search by working closely with MSFT.

Let's look at daily charts and see what they're showing us. What you'll find is that most index prices have set up recent declining price channels, and prices traded down to or near the bottom of those channels last week. The question now is whether this is the beginning of a steeper decline, or whether the indices were just trading in these flag-like formations down to the support of their larger and longer-term rising channels. Let's look.


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's chart shows that the SPX has established a flag-like descending price channel inside which it pulled back off September's highs. In doing so, it pulled back through the larger and longer-term rising price channel and even violated that longer-term rising channel on Friday's close.

The SPX teeters on the edge of setting up a potential near-term downside target of about 1390-1396. It will set that target with continued or deeper daily closes beneath the support of that recent flag-like descending channel. Such action would render the former rising price channel defunct, except as potential resistance on attempts to climb.

None of that has happened yet, however. Today's candle was a small-bodied one, usually indicative of indecision, but its long lower wick or shadow is the kind of candle the SPX often produces at short-term bottoms. If you scan swing lows since June, you'll see a number of similar candles.

The SPX ended the day jammed against fist resistance at the bottom of the longer-term channel that it just broke through. If SPX prices steady and climb, the most immediate challenge after this one would be the 1440-1443 zone. If SPX powers through that resistance on daily closes, the next potential target is marked at the top orange oval, but the possibility of a rollover remains from any of those potential resistance levels.

Further potential targets are marked on the chart.

Annotated Daily Chart of the Dow:

The Dow's prices also teeter on the bottom edge of that new descending price channel. Based on Keltner evidence, the Dow has actually set its next downside target of 13020-13100, but the Dow can be pushed around a bit, so it would be easy for it to continue this bounce up and undo that target. At the close today, it was testing the 45-ema, the demarcation average for that new downside target. A sustained scramble back above that average erases the potential target. For now.

Dow bulls need to send prices up higher to erase that target quickly, though. Consistent closes below that price channel or any close deeply below it could quickly power the Dow down to that potential downside target of 13020-13100. When we look at the NDX's chart next, we'll see an example of how quickly that next target can be reached.

The Dow has already broken down from the automatically drawn regression channel inside which it rose off June's low, but not from a price channel that incorporates all candle shadows or wicks. There's ambiguity there, too, but I suggest that traders at least keep that potential downside target in mind as a possibility if not yet a given.

If the Dow should maintain prices back inside that flag-like descending price channel and then manage to bounce higher within that channel, it will hit potential resistance near the red 9-ema, but the Dow's prices haven't paid much attention to this moving average in its zigzagging motion through the descending price channel. Expect stronger resistance from the bottom of the former regression channel up to the top of descending price channel, although any close over the 9-ema technically sets a potential price target as high as 13650-13700.

Annotated Daily Chart of the NDX:

The NDX has broken down out of its rising price and/or regression channels from June's low, no matter how you draw them. It's broken down definitively. It tumbled straight down to the next potential Keltner support level, in keeping with such a breakdown. Yet prices cling to the potential Keltner support on daily closes that's now being tested. Prices resist setting the next downside target, which is a steep one for the NDX, down below 2450. The target zone is marked on the chart.

The NDX's price action shows what can happen with the SPX and Dow. The NDX's prices very quickly hit the next downside target that's analogous to the 1390-1396 and 13020-13100 zones for the SPX and Dow, respectively. The NDX is a classic picture of what can happen if those targets are set and maintained.

However, the NDX prices did cling to that potential support that it hit Friday and today. Today's candle indicated indecision. There's the possibility that it was just a pause before the NDX tumbles lower again, but there's also the possibility that the NDX could rise through its descending price channel again. Big money was not decided today, and who are we to argue with big money and decide we know the answer?

If the NDX does power higher again, strong potential resistance on daily closes converges from the red 9-ema to the location of its former rising regression channel. Strong rollover potential exists there. If the NDX instead powers through that, next potential resistance is marked by the top orange rectangle.

Annotated Daily Chart of the RUT:

RUT futures were positive this morning. I thought it possible that the RUT might attempt to rise this morning but then soon to drop back, perhaps as low as 812 and perhaps lower. The RUT didn't drop that far, but the RUT price action still maintains a Keltner potential price target from about 802-812.

What does more common traditional analysis show? First, we note the small-bodied candle indicative of indecision. The RUT did not leave as long a candle shadow or wick as did the SPX and Dow, but that doesn't mean that it can't spring up from this test.

I've redrawn the regression channel climbing off June's low for the RUT and changed it to a price channel incorporating most candle wicks or shadows. We can see that the more inclusive channel's support also converges with that Keltner target I've mentioned from 802-812.

What we have so far, then, is the RUT pulling back through months-long rising price channel via a smaller and tighter declining price channel--a flag. Painful as the decline through that flag shape might be for bulls, it's not yet proof of anything. The RUT could be establishing a new downtrend, but this chart just does not prove that yet.

If the RUT fails to hold that mentioned support at the lower orange triangle, however, it sets a painful new potential downside target, now near 730. If it instead steadies on daily closes, either from the current level or from potential support above 800, and begins climbing, potentially strong resistance on daily closes might be found near 828-832, where several forms of potential resistance converge. If the RUT can power through that, the next target and area of potentially strong resistance on daily closes is marked by the top orange rectangle. Further potential upside targets are marked on the charts, too.

I like to include at least one chart of a sentinel index, future contract, or stock, and I had many candidates today. I elected to include AAPL.

Annotated Daily Chart of AAPL:

AAPL tested the same Keltner setup as the NDX, of course, but also the same one the RUT and Dow have set as potential targets. Now it's rising sharply. You might notice that the falling red 9-ema has tended to serve as resistance on most daily closes, and that AAPL's climb today stopped near that average. Before we can believe that AAPL's bounce is anything more than just a technical bounce, we have to see sustained--and not just one- or two-day--closes back above the 9-ema.

Tomorrow's Economic and Earnings Releases

Of course, we have the last presidential debate tonight. While that can have economic consequences, particularly for certain sectors of the economy (coal, healthcare, etc.), it's difficult to predict whether this one will and what that impact would be. This debate focuses on foreign policy, and the dollar and energy will almost certainly be discussed. For example, if former Governor Romney is deemed to have won the debate, will the dollar rise or will market participants feel that it's unlikely his policies will effectively impact the dollar? Lately, stocks and commodities have moved in opposition to the dollar, but those relationships have been different at other market periods and can shift again.

Market participants should be alert to the possibility of a move in the dollar either direction and understand that move could impact stock and commodity prices. Forex moves have already drawn focus the last few days because of Hong Kong's intervention and then last night's weakening of the yen after Japan's export news. Beyond that, "I got nothing for you" as far as suggestions as to whether the debate will have any impact or what that impact will be. It just felt as if I were missing something not to mention the event.

Companies reporting earnings tomorrow include 3M Co. (MMM, BMO), DuPont (DD, BMO), Facebook (FB, AMC), Netflix (NFLX, AMC), United Parcel Service Inc. (UPS), United Technologies Corp. (UTX, BMO), and Whirlpool Corp. (WHR, BMO).

We of course also go on Fed watch, beginning tomorrow, and big money will be deciding how to position their portfolios ahead of Wednesday's announcements. Expect rising implied volatilities as hedging options are purchased.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Over the last several trading days, the SPX tumbled all the way through its Keltner channels on the 30-minute chart, turning those channels lower and then sliding along the lower support. During that downturn, the SPX consistently found resistance on 30-minute closes at the red 9-ema, so the first smallest sign of a change in tenor would have to be consistent 30-minute closes back above that moving average.

By the mid afternoon, it looked time for the SPX to either push back through that average, at least long enough to test the top of its smallest (grey) Keltner channel or give up and tumble lower again. It jolted lower again and only then rose in an end-of-day (EOD) punch higher through that 9-ema and then to the top of the smallest Keltner channel. It was a move that was long overdue, even in a sustained decline, but was it true buying or EOD short covering ahead of two important companies reporting earnings in the after hours?

Remember that unless the SPX forms consistent 30-minute closes above 9-ema, nothing in the tenor has changed, and the SPX could continue sliding lower down the declining Keltner channel support. If the EOD run up is reversed tomorrow morning, look for (hope for?) potential support on 30-minute closes in the 1420-1422 range and then another try at the 30-minute 9-ema. If that steadying doesn't occur, it's possible for the SPX to jolt lower again.

If the SPX instead maintains 30-minute closes above a turning-higher 9-ema, successive potential upside targets and resistance on 30-minute closes are marked on the chart. The SPX was testing one of those levels at the close, so even if the SPX is going to strengthen, it may need a pullback to the 9-ema sometime early tomorrow morning.

Annotated 30-Minute Chart of the Dow:

As is often true, the Dow's setup on the 30-minute chart was similar to the SPX's. The Dow has also turned its Keltner channels lower again. It's been sliding along the lower support, finding resistance on 30-minute closes at the red 9-ema each time it's been tested until the end-of-day action. By mid-afternoon, it was time for the Dow to either punch up through the 9-ema, at least high enough to test the upper boundary of its smallest Keltner channel, or tumble lower. The Dow also jolted lower before the EOD punch higher. Was this short-covering ahead of the afternoon's reports or is the selling over?

As with the SPX, those hoping for a sustained bounce need to see the Dow sustain 30-minute closes above a turning higher (red) 9-ema. This average has served as resistance on 30-minute closes during the downturn, and it often serves as support on closes on a rally, so that needs to happen. If the Dow sees selling tomorrow and prices drop back below that moving average, watch for potential support near today's low, and hope for it if you want to see a sustained bounce. Otherwise, the Dow will be maintaining a much lower target on its daily chart.

If the Dow makes gains tomorrow morning, those who want to see a change in tenor will want to see the Dow form consistent 30-minute closes above a 9-ema that is turning higher. First important resistance might be encountered at soon as 1335, with other potential targets/resistance levels marked on the chart.

Annotated 30-Minute Chart of the NDX:

The NDX's pattern today was a little different. The resistance on 30-minute closes at the declining 9-ema was not as consistent, hinting that buyers of NDX stocks might be nibbling or that shorts might be covering. In fact, the NDX punched up through the 9-ema, high enough to at least test the smaller Keltner channel's upper boundary, early this morning even. Prices couldn't maintain there, but the NDX led the way in punching up to test that channel line again this afternoon. When other indices jolted lower in the afternoon, the NDX's jolt was more of a minor slip or misstep, soon reversed by that EOD move.

With two tech stocks reporting after the close and with markets having dropped significantly, shorts might have been anxious to lock in profits and take some risk off the table. Our risk, then, when evaluating the afternoon action is that what looks like a change in tenor for the NDX, at least a short-term one as portrayed by the 30-minute chart, might have been a mirage produced by short-covering.

By now, you know what to study. If we are to believe there's been a change in tenor in this chart, we'll need to see the NDX forming consistent 30-minute closes above a rising 9-ema, and the NDX finding support at that moving average if it's tested on pullbacks from overhead resistance levels. Those levels are marked. I've also marked potential downside targets and support levels if the NDX should roll over tomorrow instead of build on today's gains. The NDX did not satisfyingly clear resistance on its daily chart, so a rollover remains a possibility. Those who want to avoid a deeper downside target being set need to see support near today's low hold on retests.

Annotated 30-Minute Chart of the Russell 2000:

The RUT tends to overrun boundaries, and the action with respect to its 30-minute Keltner charts was no exception. While other indices mostly slid lower along the lower Keltner channel's boundary, the RUT broke through even that boundary, in full-out breakdown mode. It's always difficult to weigh how much credence to give this kind of breakdown on the RUT. In more sedate indices, this would not bode well for the rest of the day, but the RUT didn't even make it down to the top of its next target zone, near 812 on the daily chart.

Like the SPX and Dow, however, the RUT consistently found resistance on 30-minute closes at the red 9-ema during its decline. By midafternoon, when the RUT's candles had marched sideways into that declining average, it was time for the RUT to either punch up through that average and test the upper boundary of its smallest Keltner channel or else fall away again. Prices fell through the 818 level that had been holding as support, but not far below that support before the EOD bounce began. Like the NDX, the RUT punched up through the 9-ema and the RUT almost reached the top of its smaller Keltner channel, too.

Short-covering or real buying? We'll see tomorrow and in the days that follow. Those who want to see the RUT steady now without ever dipping down to the 800-812 zone want to see consistent 30-minute closes above a turning-higher 9-ema. The EOD move didn't give enough time to ascertain whether there were consistent 30-minute closes above that moving average. If those closes can be maintained, the next potential upside target and potential resistance on 30-minute closes is marked, as are successive possible targets.

If the RUT gaps below or falls back below the 9-ema tomorrow morning and doesn't quickly reverse, I would put the possibility of a move to 800-812 on my radar screen of possibilities.

What do we have and what should we expect? As noted before the charts were shown, we have indices that have steadily moved lower through the channels in which they rose off June's lows. They did it in the shape of a flag with clearly defined channel lines.

The NDX showed us what can happen when Keltner support is violated and a next lower target set. Nothing particularly unexpected has occurred as yet as indices zigzag down to test rising channel support, but now it's do-or-die time. Time for a bounce or time for some of those other indices to follow the NDX's, and, to some extent, the RUT's patterns. Based on the daily candles the SPX and Dow produced, those two indices should build on their gains, so something may be wrong if they don't.