Market Internals


This weekend, two of my granddaughters introduced me to a game in which players tap each others extended index fingers in certain patterns. We were all sitting at the table with index fingers extended as they explained.

Sunday talk show slots were filled by politicians earnestly pointing fingers, too, but they weren't playing games. At least, they weren't playing fun or mildly challenging games. Little will be gained by rehashing all those fiscal-cliff arguments from Sunday or similar comments made today, and it would disturb the holiday cheer. The feeling that prevailed was that anyone standing near enough the cliff to attempt a resolution was likely to skid right off the icy edge.

No U.S. government offices scheduled economic reports for today. Many equity traders were likely to be happy that our equity markets maintained some stability, and that options traders weren't forced to adjust on a low-volume day. At the early close this afternoon, the SPX had dropped 0.24 percent; the Dow, 0.39 percent; and the NDX, 0.25 percent. The RUT dropped 0.38 percent, and the SOX, 0.37 percent.

A CME Group report noted sharply increased ethanol supplies unmatched by an increase in production. CME Group surmised that the sharp rise in those inventories, especially when combined with a similar rise in gasoline inventories the last four weeks, indicated weak fuel demand. Crude futures (/CL) were last at 88.74 as this report was edited, down from last week's 90.54 intraday high on 12/20. Gold futures (/GC) were 1660.40, up from last week's multi-month low of 1636. Silver futures (/SI) weren't seeing much of a bounce, however, at 29.97 as this report was typed and not much above last week's 29.635 multi-month intraday low.

Monday's Developments

Japan's Nikkei 225 was closed last night due to a bank holiday. The Hang Seng was open for a shortened day of trading and traded higher by 0.16 percent. The Straits Times also appeared to have been open a half day and to have gained 0.16 percent. China's Shanghai Composite gained 0.27 percent. South Korea's Kospi gained 0.1 percent.

Unwelcome news came yesterday from the South Korean experts who retrieved parts of the first-stage rocket launched by North Korea earlier this month. After analyzing the parts they retrieved, those experts concluded that North Korea has likely now developed missiles capable of endangering the U.S. West Coast. However, the same articles reporting these conclusions noted that North Korea has likely not yet developed the technology to miniaturize a nuclear bomb and mount it in a missile. The results did not allow a conclusion as to whether North Korea's missile technology has developed enough to allow for a launched payload to survive vibrations and reentry heat.

News came today that Standard & Poor's had dropped Egypt's rating to B- with a negative outlook. This represented a lowering by one level but the level is now six below investment grade. The company cited the political instability.

Europe's DAX was closed today, and it will be joined by most of the rest of Europe's bourses through the middle of the week. Europe's news produced its own back-and-forth political upheaval, however. After resigning his position as prime minister on Friday, Italy's Mario Monti said Sunday he would consider running as a candidate for a coalition, if a coalition of allies approaches him and appears ready to back his austerity programs. That may be parsing words since, if the former prime minister ran as part of a coalition and that coalition was elected, he would be the presumptive prime minister. Once elected with a majority, a party or coalition then chooses a prime minister from among its members. The FTSE 100 gained 0.24 percent, but the CAC 40 dropped 0.24 percent. Spain's IBEX 35 gained 0.10 percent.

In the wee hours of the morning, the EUR/USD had rebounded off a several-day low reached about midnight. For those not used to watching these currency pairs, that means that the euro gained with respect to the U.S. dollar, or the dollar weakened with respect to the euro. Since our dollar futures were also weakening and since equities and commodities often tend to behave in opposition to the direction of the dollar, market watchers had to wonder if the premarket weakening of the U.S. equity futures would hold after the market open. However, as our open neared, the EUR/USD pair weakened again as dollar futures gained. Moreover, the dollar had strengthened against the yen, too. Japan's newly reelected prime minister has asserted Japan's intention to fight efforts by other countries to devalue their currencies against the yen. In a change from what had been seen in the wee hours of the night, currency movements backed up what was seen in equity futures. The stage was set from that time for an equity decline.

In the thin pre-market trading, some story stocks were moving big after price targets were raised (FB, 26.93, up 0.67 or 2.55 percent, and YHOO, 19.65, up 0.30 or 1.55 percent) or on news. The Wall Street Journal revealed that Regions Financial (RF, 6.99, down 0.12 or 1.69 percent) was the subject of an SEC investigation concerning bad loans.

Apache Corp. (APA, 78.68, down 1.32 or 1.65 percent) and Chevron Corp. (CVX, 108.63, down 1.08 or 0.98 percent) both dropped after announcing a joint venture by their Canadian subsidiaries. The joint venture concerns the Kitimat liquefied natural gas project that they will build and operate and the shale gas resources in British Columbia that they will develop. EOC Resources (EOG, 122.77, down 0.80 or 0.65 percent) said it would sell its stake in the Kitimat LNG facility as well as a portion of its acreage on the Horn River Basin.

J.C. Penney Company (JCP, 19.87, up 0.28 or 1.43 percent) benefitted when Oppenheimer & Co. analysts expressed optimism about the retailer's holiday season and the effects of its turnaround strategy on 2013.

Another retailer, Nike (NKE, 105.60, up 0.50 or 0.48 percent) added to Friday's bounce. It reported earnings of $1.14/share, ahead of the expected $1.00/share. Revenue was $5.955 billion, which was below the expected $6.019 billion. The company reported a slightly decreased gross margin.

Ford Motor Company (F, 12.40, up 0.54 or 4.55 percent) gained strongly. When I noticed the stock being touted as one of the biggest gainers for the day, I looked for news but didn't find it. Even with the shortened day, a holiday for many investors, volume was above average. F's big gain brought it into the $12.00-$12.82 chop zone that has proven to be strong resistance over the last two years.

Late Friday, Groupon (GRPN, 4.63, down 0.19 or 3.94 percent) announced that it had acquired Internet-based channel management technology company CommerceInterface. GRPN investors must not have liked the deal.

After announcing FDA approval for its schizophrenia and bipolar disorder treatment Adasuve on Friday, Alexa Pharmaceuticals Inc. (ALXA, 4.99, down 0.80 or 13.82 percent) gapped lower. It dropped heavily on volume about five times average.

The decline in Microsoft (MSFT, 27.06, down 0.39 or 1.42 percent) was blamed on a New York Times report on disappointing Windows 8 sales. The article said PC makers were disappointed.

After-hours developments include news that S&P Capital cut its target for Target (TGT, 59.64, down 0.06 or 0.10 percent) to $70.00. 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:

Last week, the SPX again rebounded off the spine of its climbing 9-ema, just as bulls would want. The SPX broke out above the Keltner resistance that was its closest target, then near 1445. However, that breakout was not followed by the sideways-to-sideways-up small-bodied candles that usually follow such rebounds when the SPX is in rallying mode. Instead, the pullback was stronger, with the 12/19 candle retracing more than half the previous day's strong candle. That next-day weakness suggested a likely retest of the red 9-ema, which has already occurred. It also suggested a possible pullback all the way through its smallest (grey) Keltner channel, with that channel's lower boundary now in the 1409-1412 zone.

That pullback to 1409-1412 looked more possible due to the SPX's response to breaking out, but it's not a guaranteed development. If that further pullback happens, it's just a routine and to-be-expected pullback. It is, if that's as far as it goes. Bulls should be alert to either of two following developments, however: either sustained daily closes beneath the green 120-ema or else a bounce from the lower grey channel line that then stalls near 1430-1440 and begins to roll over again. Neither of those is good news for bulls.

It would be useless to speculate on whether these potentially more bearish outcomes will be more likely than a routine pullback and resumption of the move up toward 1460-1465. Which outcome occurs depends on events beyond our capacities to control or predict. We can't even set if/then scenarios, because "if," for example, we hurtle over the cliff, but most market participants feel that it's just a political arm wrestling event that will soon result in a decision, "then" the result might be a steadying and then resumption of the rally. In the opposite scenario, politicians might announce some time this week that a deal is imminent, but if no one believes them, then markets could crater.

If we did not have the cliff dropping away right in front of us, the most likely scenario would be a downdraft to 1405-1412, a bounce from there, and then . . . well, then we see. However, we do have the cliff dropping away right in front of us, and it will be perception by big money, not us retail traders, that drives the next development.

Annotated Daily Chart of the Dow:

The Dow has already made much of the journey down toward the bottom of its smallest grey Keltner channel, now near 13050-13100. This chart shows potential Keltner and historical support converging in a tighter formation than was seen on the SPX chart. That means that it's possible that the Dow's approach to the bottom of its smallest Keltner channel may just approach and not quite hit the lower boundary. Watching the Dow Jones Transports may be key in gaming the Dow Jones Industrials' next movements, too, as the Transports sometimes telegraph next direction. We'll look at that chart later. As Jim explained this weekend, the Transports have already hit a new recent high and the Dow needs to follow shortly, or Dow Theory aficionados will begin worrying about the bearish signal given.

For now, bulls shouldn't be too concerned about a downdraft that stops anywhere from Friday's low down to about 13050, it that's as far as it goes. Sustained closes below 13000 set the next marked downside target, however. Bulls should also be wary if the Dow should find support in this potential support zone but then stall and roll over again beneath the red 9-ema's potential resistance on daily closes. Other potential upside and downside targets are marked, with each coming into play once there are sustained daily closes breaking through the barrier just above or below it.

Annotated Daily Chart of the COMP:

Unlike many other indices that have been bouncing on daily closes off the spine of a rising red 9-ema, the COMP has been trading back and forth across that average, flattening it a bit. That kind of action signals that there's not as strong a trend in place. We know that AAPL's decline has helped produce that trendless state, and NDX and MNX options traders should certainly keep AAPL's chart on their radar screens. So far, AAPL continues to find resistance on daily closes on a descending red 9-ema, so its trend over the last several weeks is down. Bulls in the NDX and MNX want AAPL's trend to change, but so far, it has not.

The COMP's daily candles are caught in a mesh of potential support and resistance. It's impossible to predict whether this index will next move to the top of its smallest grey channel near 3060-3070 or to the bottom, near 2970-2975. It proves even harder to predict what will happen when prices test either the upper boundary's potential resistance on daily closes or the lower's potential support.

Further-out potential targets are marked on the chart, if either of those boundaries are broken on sustained daily closes. A clear trend will not develop until you see daily closes either bouncing from a rising 9-ema or bouncing back from a declining 9-ema.

Annotated Daily Chart of the RUT:

Unlike the COMP, the RUT has had a clear trend in place, and that trend has been a rallying trend. The RUT's daily closes have been climbing the spine of a rising red 9-ema. The RUT led the way, climbing all the way to the next Keltner channel's target, a target that the SPX had set, for example, but now perhaps erased.

What happens next for the RUT? It's time for the RUT to either break through this next potential resistance on sustained daily closes, with that resistance at 850-855, thereby setting its next target, or else pull back while bulls and bears realign themselves and determine which group is strongest. If the RUT is to continue its strongest rallying behavior, a pullback would find support on daily closes on the 9-ema.

However, it's been a long time since the RUT has closely approached the bottom of its smallest Keltner channel to test support. It may soon be time for that test to occur just in the normal course of events. This is not a prediction that such a test will occur soon because the RUT's climb up to its 868.50 September high featured a longer climb without testing the bottom of its smallest Keltner channel. However, even bulls should begin to watch for that possibility.

Bulls want that lower grey Keltner channel line's support to hold if tested. A strong downdraft should push that grey channel's support down toward the 45-ema, so somewhere in the 822-826 range. Bulls certainly want the green 120-ema to hold as support on daily closes. A failure to hold that support sets a new downside target just below 800.

As Jim Brown has mentioned many times, the RUT is a barometer of the markets, showing when storms or clear skies might be most likely. Whether you trade RUT options or not, you want the RUT to move in the direction that benefits your trade if you're trading equity options.

Annotated Daily Chart of the Dow Jones Transports:

Like the RUT, the Dow Jones Transports tends to lead the way on breakouts or breakdowns, and tends to move big when it moves. The Transports joined the RUT in hitting its upside Keltner target last week. It also joined the RUT in finding potential resistance on daily closes at that target/resistance zone.

You can see the trend: daily closes climbing the spine of a rising red 9-ema. It's been a long time since the Transports have dipped down to test the bottom of its smallest (grey) Keltner channel. Traders watching this index as a guidepost for the Dow Industrials and general market health need to be aware that this index is becoming more and vulnerable to such a pullback. Right now, that would also constitute a pullback to retest its breakout level, near 5200, to see that if long-term resistance now holds as support on retests.

This is not a prediction that such a pullback will occur immediately. Traders just need to be aware that such a test is due, that it is a normal part of market behavior, and that they need to watch how the Transports behave around 5200 as one of the gauges of what happens next. I'm waiting for a package that was supposed to be delivered before the holidays. It hasn't arrived on time, but that doesn't mean that it isn't on the way and that I'm not watching for it. The same is true of these normal market behaviors. We just need to be aware that they're on the way, sooner or later.

Wednesday's Economic and Earnings Releases

What about Wednesday?

As I mentioned last week, fiscal-cliff developments will swamp anything showing up on intraday charts. I'm going to show the intraday charts as I usually do, but last Monday, they suggested that a pop-and-drop scenario was most likely for Tuesday. The "pop" portion was certainly right, but with hopes for a fiscal-cliff resolution sky high last Tuesday, there was no drop, as frightened shorts observed. Take anything shown here with a grain of salt. Make that a block of salt.

Annotated 30-Minute Chart of the SPX:

The SPX begins to create a descending pattern on this 30-minute chart, with both top (grey channel) resistance and support descending. That's usually a sign of weakening strength and a suggestion that the breakout will be to the downside. That may be what it usually hints but that's not necessarily true in this market environment. An announcement Wednesday morning that an accord has been achieved, could easily gap the SPX above the top of that grey channel and send it running. What it would do after that knee-jerk reaction we don't know yet. If the SPX breaks out with sustained 30-minute closes (or a huge gap that isn't quickly reversed), next potential targets are marked. Just remember that on this chart and the ones that follow, a strong or sustained move in any direction will push these dynamic Keltner lines in the direction of the move.

Annotated 30-Minute Chart of the Dow:

Like the SPX, the Dow's smallest (grey) channel descends, and prices have been trailing lower inside it. All the same chart setups and caveats to those setups exist here, too. In addition, the Dow is a narrower index, more easily pushed around than the SPX. In case of a breakout manifested by consistent 30-minute closes outside the orange rectangles, the next potential targets are marked. Support and/or resistance on 30-minute closes may be found at those targets, too.

Annotated 30-Minute Chart of the NDX:

After underperforming the SPX and Dow by Keltner measures over last week, the NDX appeared somewhat steadier than those others over the last couple of days. The NDX's smallest (grey) Keltner channel is flattening, although that will mean little if we return Wednesday with news that all negotiations have fallen apart or that all the participants have shaken hands on a new done deal. Potential next targets are marked in case the NDX breaks out of the channel marked by the orange rectangles, with a breakout manifested by 30-minute closes outside them.

Annotated 30-Minute Chart of the Russell 2000:

After breaking out of all channels in a strong momentum run last week, the RUT has dropped back inside the channels. The chart setup suggests that a climb to 850-853 is about as likely as a drop to 837-840 and vice versa. I haven't shown RSI, but it's been jiggling back and forth across the neutral 50 level, too, so this chart makes no predictions about next direction.

The RUT will be a good index to watch for a heads-up, however, as is the Dow Jones Transports (^DJT on some sources). Daily chart setups show that sometime soon--maybe after another burst higher or maybe before--it's time for the indices to slip down to retest lower Keltner channel support. However, we saw last week just how quickly fiscal-cliff headlines can overwhelm chart setups.

To all who join me in celebrating Christmas, Merry Christmas! I hope all who celebrated Hanukkah over the last month had wonderful holidays, even if you had to work through most of them. To those who will celebrate Kwanzaa beginning in a couple of days, Happy Kwanzaa! If I've forgotten a holiday, Happy Holiday I forgot! And to all of us, happy time off work and time to be with friends and family or just to breathe and forget about the markets. Breathe! And safe driving to all traveling to be with friends and family.

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