Market Internals


Our younger subscribers may not catch the title's reference to the game show, To Tell the Truth. In that show, four celebrities asked questions of three challengers. The celebrities attempted to determine which of the challengers held an unusual job or accomplishment, while the challengers attempted to fool the celebrities. Over the last several weeks, we've seen several versions of our economy presented via surprises on economic reports. Those reports surprised to the downside a couple of weeks ago and to the upside last week. Which is the real economy?

We did not find out today. We did determine that the equity markets are no longer invulnerable to nasty surprises such as those presented by developments in Europe today. We'll hear lots of talk about what caused today's pullback, but the truth was that those so-called causes were nothing more than catalysts for pullback that was long overdue. Equity markets needed an opportunity for weak hands to bail, for prices to plumb for strongest support.

Today, the SPX dropped 1.15 percent; the Dow, 0.93 percent; and the NDX, 1.75 percent. The RUT fell 1.31 percent, the Dow Jones Transports, 0.63 percent; and the SOX, 1.51 percent. U.S. financials as represented by the BKX also dropped 1.22 percent, perhaps in response to concerns about financials across the globe. The home builders as represented by the $DJUSHB had tumbled sooner than many other indices, falling Friday off the high to close near the low of the day. Today, the index continued the decline, dropping 1.65 percent. The mighty AAPL dropped 2.49 percent.

In response to Europe's difficulties, the euro tumbled in relationship to the dollar, with /dx futures moving higher. That move pressured commodities such as crude, with light crude ending lower by 1.64 percent. However, April 2013 gold futures managed a 0.35 percent gain, closing in the middle of the day's range. The March 2013 silver contract fell 0.76 percent, also closing in the middle of the day's range. Platinum was higher; copper, lower. The AAA announced that the average price for a regular gallon of gasoline had risen $0.174 this last week, with that average price at $3.52 a gallon.

Monday's Developments

Most Asian bourses reported gains last night, but those gains did not translate into gains in U.S. futures or European bourses. China's Shanghai Composite gained 0.38 percent; the Nikkei 225, 0.62 percent; and the Straits Times, 0.19 percent. The Hang Seng lost 0.16 percent.

Although Spain's unemployment change was a better-than-expected number, all is not well in Spain. An alleged corruption scandal relating to politicians currently holding office prompted Spain's opposition party to call for the resignation of Spain's prime minister. A reshuffling of the government might question or weaken the reforms already put into place. To make matters worse, the results of Italy's next election are not as certain as they had appeared to be and that government deals with a potential scandal there, too, over a failure to disclose derivative losses. These concerns resulted in higher bond yields in both Spanish and Italian 10-year bonds.

In addition, in the U.K., Finance Minister George Osborne threatened to break up banks that failed to adequately separate their proprietary trading activities from other banking activities. The banking industry counters with the argument that the proposed laws would place Barclays, RBS, and HSBC at a disadvantage in the global banking community.

The FTSE 100 dropped 1.58 percent; the DAX, 2.49 percent; and the CAC 40, 3.01 percent. Spain's IBEX tumbled 3.44 percent.

In the U.S., today's scheduled economic releases began with the New York JAN ISM at 9:45 am. This number rose to 568.3 from the prior 564.9. The current conditions component fell to 56.7, and the six-month outlook dropped from 69 to 60.

Today's scheduled economic releases also included December's Factory Orders at 10:00 am EST. November's orders had been unchanged, but experts had anticipated a gain of 2.3-2.4 percent, depending on the source. Since last week's upside surprise in durable orders, some market watchers might have anticipated more. Instead, the Commerce Department reported a 1.8-percent gain. To refresh subscribers' memories, this number revises the data from last week and also includes new data about non-durable goods.

Those orders for non-durable goods dropped 0.3 percent due to declines in tobacco and petroleum. Gains in orders for durable goods were revised to 4.3 percent. That wasn't far off last week's 4.6 percent. However, if aircraft and military equipment are excluded, the gain in durable goods disappears. Without those items, the orders fell 0.3 percent, slightly more than the 0.2 percent drop reported last week. The component measuring investments by businesses in equipment and software rose at a 12.4 percent annual rate, however.

Some pundits worried that the result signaled a stalling in the U.S. economy while others pointed to possible unexpected strength in manufacturing. Apparently, the pundits could not agree as to which is the real economy. The results did little to cheer U.S. market watchers or to persuade them to ignore losses in Europe.

Moody's Business Confidence was also reported at 10:00 AM, weighing in at 19.3, up from the prior 17.3. Moody's concluded that business confidence "remains within a range that has prevailed more or less since the recovery began nearly four years ago . . . consistent with an economy growing at the low end of its potential." That did nothing to point to the real economy, either.

Blackberry made the list of story stocks today. If you're still looking for quotes under the ticker symbol RIMM, you're not going to find them. The new ticker symbol is BBRY (14.98, up 1.96 or 15.02 percent). Several news outlets reported the new Z10 was finding strong demand in the U.K., with lines outside the outlets selling them. Sales were termed "solid" in Canada and the United Arab Emirates. Shareholders hope some of that enthusiasm transfers to the U.S. when the company offers the devise for sale here in March.

Once a stock makes it onto the list of story stocks, it tends to stay there, and Herbalife (HLF, 35.54, up 0.47 or 1.34 percent) must be included again in the list of story stocks. Shareholders in that stock must be stumbling around after hours, dizzied by the day's deep plunge to 30.85, and then sharp rise into the close. Earlier, the New York Post speculated that HLF was being investigated by law enforcement, a report that the company denied. Although the FTC released data on 192 complaints over seven years, the agency would not release documents related to that purported probe, including whether it was a criminal or civil investigation. The assumption of an inquiry may have been contrived upon a somewhat thinly stretched extrapolation of the FTC response to the Freedom of Information request by the newspaper. The FTC said that it was not required to provide "information obtained . . . in a law enforcement investigation." Perhaps someone had more reliable information, a source that can't yet be named, but we can't be certain from this information provided today as to whether such a probe has been launched or not.

Story stocks also included reporting companies BIDU, CLX, EPAY, EW, GCI, HIG, HUM, and YUM, with HUM starting this group off with an early-morning report. Humana Inc. (HUM, 78.86, up 3.51 or 4.66 percent) reported $1.19/share, beating the expected $1.06/share and coming in only a little shy of last year's $1.20/share. Revenue missed, however, rising to $9.56 billion when $9.73 billion was the expectation. The company raised expectations for Q1 2013 and reiterated its prior full-year 2013 outlook. Analysts had pegged expectations for Q1 at $1.53/share, and the company set expectations at $1.75-1.85/share. In keeping with other reports among the health insurers, the company reported rising costs. In the military sector, operating costs rose, but they fell in the retail sector. Some pundits pointed out that a decline in the tax rate also contributed to the EPS beat.

Baidu, Inc. (BIDU, 107.20, down 1.41 or 1.30 percent) reported after the close, and deepened its loss. As this report was prepared, BIDU was last at 101.00, down 6.20 from the closing value. The results were characterized as unaudited results, and showed diluted earnings of $1.28/share, a penny less than the expectation, and non-GAAP earnings of $1.31/share. Total revenues were characterized as rising 41.6 percent from the year-ago period results. Active online marketing customers increased 30.5 percent from the year-ago period and 4.1 percent from the prior quarter. Revenue per online marketing customer rose 7.6 percent from the year-ago period but fell 3.1 percent from the previous quarter.

Clorox (CLX, 79.72, up 0.56 or 0.71 percent) beat EPS estimates by $0.10 a share. Revenue beat, too, and CLX raised expectations for the full year for 2013 from $4.20-4.35 to $4.25-4.35. Sales grew 5 percent, excluding items. CLX changed its formulation of its bleach products, requiring a resetting of retail shelves.

Edwards Lifesciences Corp. (EW, 93.06, down 0.35 or 0.37 percent) reported earnings of $0.90/share, excluding items, ahead of the year-ago number of $0.77/share, excluding items. The company reported strong sales or $80.7 million from its transcatheter heart valves. As this was report was prepared, the stock price had jumped 0.72 from the day's closing value.

Media and marketing solutions company Gannett Co., Inc. (GCI, 18.51, down 1.33 or 6.70 percent) saw red after their earnings reports. The company beat expectations, but publishing advertising revenue fell.

The Hartford Financial Services Group, Inc. (HIG, 24.70, down 0.51 or 2.02 percent) reported a loss of $0.13/share, blaming the loss on Sandy. This compared to a net gain of $0.23/share a year ago. As this report was prepared, the stock was lower by $0.03 but it had jumped higher immediately after the report.

Yum! Brands, Inc. (YUM, 63.94, down 1.99 or 3.02 percent) dropped in after-hours after reporting. It was last at 59.80, down 4.14 from the day's close as this report was prepared. The company said that China's KFC sales continued to be negatively impacted by "adverse publicity from the poultry supply situation." Same-store sales for the quarter declined 6 percent in China, but rose 4 percent for the year. Worldwide, system sales growth for the quarter was characterized as flat, at 5 percent, while it was 8 percent for the year. Excluding special items, the EPS was $0.83/share. One source listed $0.83/share as the expectation.

The Budweiser Superbowl (BUD, 87.67, down 4.61 or 5.00 percent) ad failed to result in higher prices for Anheuser-Bush InBev today. BUD and Constellation Brand (STZ, 31.55, down 1.13 or 3.46 percent) both declined after a Justice Department decision last Thursday to block the merger of BUD with Modelo Group, known for its Corona and other brand beers. The Justice Department felt that the merger would interfere with competition, allowing BUD to raise prices. If the merger had gone through at this time, STZ would gain complete control of Crown, Modelo's joint venture with STZ. Crown distributes Modelo's beers in the U.S. Some market watchers believe the merger will eventually happen and pointed to ongoing talks between BUD and the Justice Department.

If BUD is temporarily blocked from a M&A deal, market chatter suggests that Dell (DELL, 13.27, down 0.36 or 2.64 percent) is moving closer to its own deal. For the last week or two, market participants have speculated about the conditions under which DELL will allow itself to be sold to Silver Lake Partners. Of course the specifics will not be known until the deal is done and the paperwork filed. Market watchers assume that Michael Dell will retain a majority ownership, with Microsoft and Silver Lake being minority owners. Speculation arose that the deal could be announced as soon as today or tomorrow. Scans of news sources before this article was submitted turned up no announcements, however.

The Justice Department has also been busy investigating Standard & Poor's Rating Services' ratings of mortgage bonds in the period leading up to 2008's financial crisis. A MarketWatch article alleged that, together with several state attorneys general, the agency may be preparing civil charges against the ratings service, a unit of McGraw-Hill Cos. (MHP, 50.30, down 8.04 or 13.78 percent). The Justice Department had been in settlement talks with the ratings agency, but those talks apparently fell apart. Moody's (MCO, 49.45, down 5.90 or 10.66 percent) also fell, perhaps as investors feared similar actions against the ratings firm.

Oracle (ORCL, 35.13, down 1.08 or 2.97 percent) took part in the M&A Monday. It announced that it was buying Acme Packet (APKT, 29.59, up 5.66 or 23.65 percent).

Let's look at daily charts and determine what damage was done today, if any.


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 maintained its strongest rally pattern. The SPX did come down to test the 9-ema, closed at or near it, and then bounced strongly from it last Thursday.

By these guidelines, the SPX continued its rally pattern in its most bullish form. However, the next part of that strongest bullish pattern was for the SPX to trend sideways to sideways-up for 3-5 days and then dip again to the 9-ema. Then it would be time for the whole process to start again. In what should have been part of a sideways to sideways-up move produced by a small-bodied candle today, the SPX instead broke from the pattern and pulled back sharply to the 9-ema. The SPX ended the day slightly below the 9-ema, but the close was not deep enough to say that the SPX had breached that support.

The last two weeks, the charts have shown that the SPX has traveled far longer than it usually does without testing the bottom channel support of its smallest grey Keltner channel, currently near 1483. If that test was overdue for the last two Monday Wraps, it was even more so by this week's report.

As long as daily closes remain at or above the 9-ema, the SPX maintains a potential upside target at the green rectangle. However, even the most bullish of bulls must accept that the SPX is going to pull back to the lower boundary of the grey channel at some point, wherever that boundary might be located at that time. If now is that point in time, a pullback to that potential support will likely push that channel support a little lower than its current 1483 level. However, a push deeper than about 1474 that doesn't bounce sharply by the end of the day may target the next marked potential Keltner support near 1462.

An SPX pullback that finds support on daily closes at or above about 1474 and then scrambles back above the red 9-ema within a day or two can be viewed as part of a bullish pattern. This is how the SPX behaved last December and early January, for example.

A deeper drop or a bounce that fails at the red 9-ema signals more of a disruption to the bullish pattern. A rollover from the 9-ema, particularly if the SPX should sustain daily closes below about 1460, may be part of an eventual deeper pullback, perhaps to the next lower marked rectangle below that.

Bulls do not want to see the SPX's 9-ema flatten and then turn lower, with the SPX finding resistance at or near the rolling-over 9-ema or at the top boundary of the grey channel. Note that in downturns, the SPX tends to reach up to the upper grey channel boundary more often than it tests the lower boundary in strong rallies.

You know how the bullish pattern works. You can watch to determine if it's broken or sustained.

Annotated Daily Chart of the Dow:

The Dow also followed its strongest rally pattern last week with no change in tenor. Coming into today's trading, the potential for an upside target near 14100 remained. However, like the SPX, the Dow's action today does not fit with the typical "strong bounce off the 9-ema, sideways to sideways-up for 3-5 days, rinse and repeat" pattern.

The Dow is also overdue for a retest of the bottom of its grey Keltner channel. That channel could also be pushed lower by any such test. Bulls want to see support maintained above about 13,660 on daily closes, and preferably above that. Then they want to see the Dow climb strongly and within a few days' time produce closes back above the 9-ema. They want to see something like what happened in late December and early January, the last time the lower boundary of the smallest Keltner channel was tested.

However, if a decline is deeper than about 13,660 and if the Dow fails to scramble quickly back above the 9-ema, it may be setting up a potential target at the highest red rectangle.

Bulls do not want to see the Dow drive low enough to roll the 9-ema lower. They especially do not want such an action to be followed by resistance on daily closes at either a rolling-lower 9-ema or the upper boundary of the grey Keltner channel. That type of action suggests a downturn in effect.

You know how the pattern works. You're armed with the information you need.

Annotated Daily Chart of the NDX:

As has been true lately, the NDX's behaviors are not open to easy interpretation. Prices churn back and forth across the 9-ema, rendering that moving average useless for prediction of next direction. That doesn't render the 9-ema totally useless, however: the churn back and forth across that average tells us that the NDX still has not established a strong trend in either direction. The action shows us that although the NDX has been going sideways-up for several weeks, its movements don't constitute a rally pattern.

The NDX's next target could be 2780-2805. It could as easily be 2690-2705. Today's strong red candle gives a slight preference to the lower target, but the NDX doesn't like to follow norms.

Annotated Daily Chart of the RUT:

Last week, the RUT followed its strongest rally pattern, too, even though it had already climbed outside its Keltner channels in a momentum run and was clearly extended. Today's action is not typical of that pattern, however, as the RUT should be in the sideways-to-sideways-up, small-candle-body days.

As was true with the SPX and Dow, the RUT is long overdue for a pullback to the lower boundary of its grey channel. That's no guarantee that such a pullback will happen. If it does, that kind of limited pullback comprises a normal pullback level for a rally as long as support is found there on daily closes. If the RUT should fall much below 890, however, and fail to bounce by day's end sharply enough to leave a long lower candle shadow, a test of 880-883 might be possible.

A failure at 880-883 targets the next potential downside target marked by a rectangle, where potential support--Keltner, historical, Fibonacci--can be found anywhere from 855-869. If the RUT's price action should pull the red 9-ema lower and the RUT should find resistance on either that moving average or the top boundary of the grey Keltner channel, prepare your trades to sustain support tests. Various potential support levels are marked by rectangles. As is true with the SPX and Dow, the RUT behaves somewhat differently on downturns. The zigzagging moves tend to take it all the way through the grey channel in downtrends more often than in uptrends, where the 9-ema tends to be the stopping point on daily closes.

Annotated Daily Chart of the Dow Jones Transports:

Unlike the RUT, SPX and Dow, the $DJT failed to make a new high on Thursday. This index has been a strong signal index, and one that I and other writers have urged subscribers to keep on their radar screens. Like the other mentioned indices, the $DJT followed its strongest rally pattern last week but today broke from that pattern. It was time for a sideways to sideways-up move accomplished via small-bodied candles. Instead, the pullback was sharp. Is the $DJT just coiling up ahead of another breakout to the upside or is this a danger signal to bulls in the SPX, OEX, and Dow stocks?

It is also time for the $DJT's prices to dip to the bottom of its smallest grey channel. A strong or prolonged move down to test that lower boundary will drive the boundary lower. As long as daily closes remain above about 5640-5700, the pullback would not look too serious, but that would also be dependent on how the $DJT acted on any attempted rebound. If any pullback turns the 9-ema lower and the $DJT rolls over at retests of that level, then the lower potential targets should be watched. This is not an optionable index, so we're not watching it in order to trade it. However, it is a good signal index as long as it's not used as an exact market-timing tool.

Tomorrow's Economic and Earnings Releases

Elizabeth Duke is a voting member of the FOMC. She is due to talk about community banks when addressing a conference in Duluth. Audience questions are expected. This talk should not roil markets, but you never know what might be said during a Q&A session.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

The SPX's 30-minute closes are typically contained within the purple channel. Today saw the SPX move all the way from the top of that channel to the bottom. The psychologically important 1500 coincides with potentially strong support/resistance levels on 30-minute closes, too. Sustained 30-minute closes back above 1500-1501 target the next potential upside levels marked by rectangles. However, a failure to sustain 30-minute closes above 1500-1501 by about mid-morning tomorrow, and particularly 30-minute closes below last Thursday's lows sets a new target at the lower red rectangle.

Annotated 30-Minute Chart of the Dow:

The Dow's actions and setup are similar to the SPX's. Consistent 30-minute closes above 13920-13930 set up the potential to test upside targets marked by rectangles. A failure to maintain 30-minute closes above last Thursday's low sets a potential downside target at the level marked by the red rectangle. Between those two zones is a kind of know-nothing zone.

Annotated 30-Minute Chart of the NDX:

The NDX's setup on the daily chart may appear quite different than that seen on the SPX's and Dow's daily chart, but it is quite similar when viewed on the 30-minute chart. The NDX also traveled from the top to the bottom of its purple Keltner channel. Unlike those other indices, however, the NDX overran the channel on the upside Friday and the downside today. We can't take the closes outside the channel or below last Tuesday's low as proof of more downside since the NDX does tend to overrun boundaries. However, as long as closes are below the purple channel boundary and maybe even as long as they're below a trending-lower 9-ema, market participants must consider a 2700 downside test a possibility. If the prices instead scramble back above the 9-ema and turn it higher, potential upside targets are marked.

Annotated 30-Minute Chart of the Russell 2000:

If the NDX overran the Keltner channel boundaries a little on Friday, the RUT overran them by a lot. The RUT, like the NDX, tends to overrun boundaries a bit more than the SPX and Dow do. However, the Keltner setup suggests that as long sustained 30-minute closes at or inside the purple channel and particularly above the red 9-ema set higher potential upside targets, marked by rectangles. Sustained closes below about 900 set the lower potential target marked on the chart.

Today's reversals or near reversals of Friday's gains is a short-term bearish sign. Charts have been showing a need for a several day retreat down to the lower end of the smallest grey Keltner channels on the daily charts. The 30-minute charts show indices verging on breaking down and tumbling toward the bottom of their Keltner channel setups.

However, we can't ignore another possibility when viewing those daily charts. Instead of the decline that appears long overdue, markets could work off their overbought status by coiling and trending sideways. Those channel lines that need to be reaffirmed as support could then climb up underneath the area of the coiling prices. We can't forget that bulls have so far continued to be rewarded every time they have bought for months. Retail bulls, at least, are unlikely to stop buying until they're spanked for doing do. It's my firm opinion that bulls should prepare for the possibility of deeper pullbacks but bears should also prepare. They should prepare for further coiling characterized by prices zigzagging back and forth. Trading options isn't about knowing exactly what's going to happen. It's about knowing what could happen and preparing stops and profit targets to protect against losses or prepare for taking profits. Good luck!