Market Internals


With Cyprus on the verge of bankruptcy this weekend, Eurozone leaders forced leadership in Cyprus to accept a shocking bargain in exchange for a bailout.

Under the current plan, Cypriot savers will be levied as much as 9.9 percent of their bank deposits to help pay for the nation's $13 billion (10 billion euros) bailout. Under the current plan, depositors with under 100,000 euros will be levied 6.75 percent while those with more than that amount will be levied 9.9 percent.

Earlier in the Eurozone crisis, European depositors were assured that all European deposits under 100,000 euros would be safe. Now a European Commission spokesperson hedged that statement, saying that guarantee referred only to a banking collapse, not to a bailout. The IMF and German government apparently pressured for this new tactic in bailout structures. The Guardian notes that Cyprus has been a haven for the deposits of wealth Russians. Russia's President Vladimir Putin has protested the levy and has called a special meeting to discuss the development.

Cypriot President Anastasiades spoke to citizens last night, saying that affected citizens would receive shares in banks, with those shares guaranteed by the future revenues from natural gas production. That wasn't enough to ease fears around the globe.

By Sunday night, critics warned that the terms of this bailout would break public trust and undermine the structure of banking, impact the euro and global stock markets. Overseas futures and global bourses took an immediate hit when they opened.

Some critics labeled the action a theft. Pimco's Mohamed El-Erain worried that the inclusion of small depositors risks social unrest and political upheaval. Worse, the move questions the sanctity of bank deposits across Europe, he agreed. Savers in Cyprus and elsewhere in Europe were attempting to use ATM's to withdraw funds, but ATM's in Cyprus soon ran out of cash. Cypriot banks were closed today.

British Chancellor Osborne took steps to protect the savings of 250 British civil servants and 3,000 military personnel in Cyprus. The chancellor said such people would be compensated by what is being called a levy or bank tax when it's not being decried as a theft.

As of today, the Cypriot parliament had not yet agreed to the bailout terms. Some speculated that the parliament will not agree and the law will not be put into effect. Others speculate that the levy will be restructured, with smaller depositors taxed much less, and the larger ones, much more. We must await further developments before we know the final terms. Although the parliament was originally scheduled to convene tomorrow, news hit this afternoon that the meeting would be postponed indefinitely. Some blamed that announcement for the swoon off the afternoon highs.

Monday's Developments

Our bourses joined other global bourses in showing declines, although the percentage declines here tended to be less than elsewhere. It's possible that news that the Cypriot parliament might reject the deal ameliorated losses. The SPX declined 0.55 percent; the Dow, 0.43 percent; and the NDX, 0.25 percent. The RUT dropped 0.55 percent, and the SOX, 1.33 percent. The DJT, the Dow Jones Transports, slipped lower by 0.33 percent. Financials were hard hit across the globe, with the BKX, the KBW Bank Index, dropping 0.94 percent. Volatility indices gained, with the VIX rising 18.41 percent; the RVX, 12.45 percent; and the VXN, 13.55 percent. The dollar showed some volatility of its own, but closed back well above its own 9-ema, at 82.90. Some commodities were initially hit by the double blow of fears of a global downturn and higher dollar prices. April gold futures, however, saw an immediate bounce, and the CME Group reported that the steadiness in gold seemed to steady silver, too. April gold futures closed higher by 0.7 percent, while silver futures gained only $0.03. Crude closed higher by 0.3 percent.

Asian bourses dropped, with Bloomberg writers Adam Haigh and Jonathan Burgos reporting that the MXAP, the regional measure for Asia, lost $190 billion in market value. The Shanghai Composite dropped 1.68 percent. Home prices in 62 out of 70 Chinese cities rose, according to a report issued last night. New price controls may be put into force as a result. The Nikkei 225 dropped 2.71 percent; the Hang Seng, 2.00 percent; and the Straits Time, 0.90 percent.

European bourses dropped at the open. A lower-than-expected trade balance in the Eurozone added to the pressure. By the close, most had bounced well off their opening lows. The FTSE 100 lost 0.36 percent; the DAX, 0.40 percent; and the CAC 40, 0.48 percent. Spain's IBEX 25 closed lower by 1.19 percent, but it had dropped more than 2.2 percent at one point. Italy's FTSE MIB closed lower by 0.85 percent. It's perhaps to be expected that Spain and Italy's bourses would come under more pressure due to the Cyprus bailout terms.

Monday's economic reports rolled in all at the same time, with the most important of those reports being March's NAHB Housing Market Index. That was expected to rise to 47-48, depending on the analyst, from a prior 46.0. Instead, the number dropped to 44. However, a look at the internals showed this negative number not to be entirely negative after all.

The NAHB characterized the number as having "paused" rather than declined. Problems that curbed completed deals included credit availability, not enough developed lots, fewer home builders, workers who had found other jobs during the housing decline, higher costs on building materials and labor, and problems with appraisals. Demand was there, the NAHB said. Builders just couldn't get the houses built and the deals completed.

The component measuring sales expectations for the next six months and traffic of prospective buyers gained, one and three points, respectively. Current sales conditions declined four points. When broken into regions, the three-month average for the West gained four points, the Northeast was unchanged, and the Midwest and South each declined one point.

Other economic releases today included January's Regional and State Employment and the weekly Survey of Business Confidence. January's Regional and State Employment showed 25 states and the District of Columbia reporting increases in the unemployment rate, 8 states reporting decreases, and 17 states reporting no change. When compared to the year-ago reports, 40 states reported decreases in unemployment rates, seven reported increases, and three registered no change.

The national jobless rate was 7.9 percent, "essentially unchanged" according to Bureau of Labor Statistics. Nonfarm payroll employment increased in 34 states and the District of Columbia and declined in 16 states. Regionally, the West had the highest unemployment rate at 8.6 percent, with the South and Midwest tying for the lowest at 7.3 percent. Dialing down further, the Pacific region's 9.2 percent jobless rate was the highest of the nine geographic regions.

The Moody's March 15 Survey of Business Confidence inched higher, to 32.7 from the prior 31.3. Moody's noted that the number was the strongest it had been in two years, climbing steadily since the presidential elections. Moody's characterizes the economy as "expanding at the high end of its potential," with hiring and investment climbing back to levels not seen since the Great Recession. Moody's warns, however, that this number has at times broken out of the narrow range in which it has been moving only to soon retreat back to that range. The firm labeled any conclusion that the business sentiment has broken out of that range for good "premature." The range from April until late February had been about 13-28.

Story stocks included Incyte (INCY, 23.79, down 1.05 or 4.23 percent). The company informed the FDA that a 75-year-old male myelofibrosis patient from the U.K. treated with the company's ruxolitinib had developed progressive multifocal leukoencephalopathy (PML). Although the company reported that this was the only known case of PML among about 9,800 patients treated with roxolitinib in clinical trials or with the commercially available product, the stock plunged at the open. Perhaps some investors felt the drop was overdone as INCY also climbed well off its 21.61 day's low by the close.

Friday's disclosure that Silver Lake Partners at one time bid only $11.22 for Dell (DELL, 14.17, down 0.14 or 0.98 percent) back in mid-2012 did not seem to be a determining factor in the stock's trading pattern today.

Apple (AAPL, 455.72, up 12.06 or 2.72 percent) gained, purportedly on renewed dividend speculation.

The U.S. Department of Justice joined hands with Constellation Brands (STZ, 47.10, up 1.35 or 2.95 percent) and Anheuser-Busch InBev (BUD, 95.62, up 0.19 or 0.20 percent) to approach the court. They requested an extension of a stay currently due to expire tomorrow. The companies, along with Grupo Modelo and Crown Imports, believe that, if given more time, they can come to an agreement on AB InBev's plan to acquire the portion of Grupo Modelo that it doesn't already own. Today's strong gains in STZ brought the stock to an all-time high, but take a look at long-term charts before you decide to plunge in with longs. STZ has nearly tripled its price since the summer of 2011 and more than doubled it just since last May's swing low.

After the close, Electronic Arts (EA, 18.71, down 0.17 or 0.90 percent) warned that it could miss its forecasts for the quarter and announced that CEO John Riccitiello would be leaving, with the previous CEO Larry Probst to serve in that capacity temporarily. The company said earnings-per-share and revenue amounts would be at the low end of previous guidance or perhaps below them. EA was last at 19.22, up 0.51 or 2.73 percent in after-hours trading.

Late in the day, news surfaced that the SEC has filed a civil fraud lawsuit against Frederico Buenrostro, former CEO of the California Public Employees' Retirement System (CALPERS). The charge alleges that he defrauded Apollo Global Management during his 2002-2008 service as CEO.

Let's look at daily charts. Last Monday, the chart setup suggested that it was again time for the major indices to dip or trade sideways into a retest of their rising red 9-ema's. That test looked due last week. We'll see a couple of charts in which it appears that the index in question traded sideways into its rising red 9-ema last Wednesday. However, it was subsequent days' action that pulled the red 9-ema's up sharply, looking as if that test occurred. On last Wednesday, the sideways approach to the 9-ema's didn't look like a close approach at all.

With the previous SPX intraday and closing highs singing their siren song, that was as close as some of those indices were going to come to a 9-ema retest last week, however. If 9-ema retests were due last week, they were overdue as this week opened. The situation in Cyprus provided the needed catalyst to do what needed to be done anyway.


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 was one of the indices that now appear to have traded sideways into their 9-ema's last week, but its approach was not close last Wednesday. If the SPX was due for a 9-ema test last week, it was overdue as this week began. Moreover, it ended last week pressed up against Keltner resistance, and the daily chart printed a doji at that resistance.

Still, the siren call of that previous closing high of 1565.15 was still sounding. Which would win out, the pressure to rise to a new closing high or the competing need for a 9-ema retest? The terms of the Cyprus bailout silenced that 1565.15 siren call, at least temporarily, and sent index futures sharply lower Sunday evening.

The SPX pierced its 9-ema this morning then bounced well off that moving average only to sink back off its afternoon high by the close. At least for now, the test showed that nothing in the bullish pattern has changed if we limit our consideration to whether the SPX maintained its close above the 9-ema. However, sellers again returned this afternoon.

Even if the SPX gains tomorrow, it again faces resistance just ahead with a week rife with possible challenges. If the SPX should gain tomorrow, traders should be watchful for rollover potential, particularly if the prior closing high of 1565.15 is tested or pierced but followed by a sharp pullback in prices.

Bulls always want to see any 9-ema or grey channel support tests followed by a strong bounce, several days of sideways to sideways-up movement and then a retest and repeat. Today's close left traders with some questions. Now that the 9-ema test has occurred, bulls need to see, at the least, a small-bodied candle sitting at the support, but they would prefer a strong gain. If one of those doesn't occur, the SPX then might be vulnerable to decline below support tested today, and perhaps a grey channel retest.

In the event of a grey channel support test, bulls want to see the SPX daily candles closing back above a still-rising 9-ema within a day or two. A drop through the grey channel support on consistent daily closes sets a potential next downside target at the highest red rectangle.

If the SPX rises in the coming days, it will face resistance at the highest yellow-orange rectangle. If it continues breaking through resistance and particularly if it can sustain daily closes above its prior 1565.15 closing high, we can watch its behavior on 9-ema tests to determine when the trend is still in place. Short-term traders can then follow the SPX higher with their stops. We have to turn to a weekly chart for a potential upside target in that case, with that weekly chart setting a potential upside target currently at about 1636. I wouldn't count on that being set or being approached in one quick swoop higher.

Annotated Daily Chart of the Dow:

The Dow didn't even pretend to retest the rising 9-ema last week, but it did this morning with verve. If the Dow resumes its rally pattern by producing a strong gain followed by several days of sideways movement and then another dip to the 9-ema, nothing has changed. However, as with the SPX, a change in that pattern now that it's tested the 9-ema could be an early alert that the upward momentum is waning. The Dow then might roll over into another 9-ema or grey channel support test. If that grey channel support is broken on sustained daily closes, the next potential downside target is marked by the upper red rectangle.

With last week's close, the Dow's chart has already set up a new potential upside target on the weekly chart (not shown). That target is currently at about 15,130 but will change in the direction of the Dow's movement. The last four years, the Dow has several times overrun the boundary that set up a new potential weekly target. However, when that has happened, the Dow's behavior has tended to become more volatile in both directions, and it has slipped eventually back beneath the boundary setting that new target without ever reaching it. Today's intraday behavior would be in keeping with that "more volatile in both directions" behavior. Therefore, I would watch the Dow's behavior with respect to the red 9-ema and grey channel support on the daily chart for guidance as to whether the rally's momentum is waning. So far, the daily close held above the red 9-ema, but the afternoon decline was not encouraging.

Annotated Daily Chart of the NDX:

The NDX did thoroughly test its red 9-ema last week. It tested it so thoroughly and so many days that it had flattened it a bit by Friday afternoon. The NDX was not rising from 9-ema tests, so that pattern was still not a convincing rally pattern. That was especially true since the closes were all within the boundaries of that broadening formation. Why does that matter, since prices were rising? It doesn't if your bullish trades are making money and you were following them higher with your stops, but the failure to institute a strong rally pattern warned bulls to be more than commonly protective of bullish profits.

By Friday afternoon, the pattern already suggested that the NDX could drop to test the grey channel support as easily as it could jump up to the top of the broadening formation, where potential resistance masses. Today, the NDX did test the grey channel support and bounced from it as handily as the other indices bounced from their 9-ema tests. Unlike the other indices, its afternoon decline did not much shorten that long tail or candle shadow left behind. That shadow now makes a test of the upper boundary of its broadening formation look more likely than another immediate drop to the grey channel support, but I wouldn't rule out such a drop. The NDX is not trending and remains within that broadening formation. Any conclusions drawn from behavior within a noisy zone are undependable.

The NDX faces significant potential resistance on daily closes at the orange-yellow rectangle. If it breaks through on sustained daily closes, the next potential upside target is marked by a green rectangle, although NDX will also encounter the level of the September intraday high of 2878.38 right after breaking out of the broadening formation. Guard bullish profits in that 2835-2880 zone.

If the NDX rolls over and breaks through its red 9-ema on daily closes, consider the possibility of a test of the marked next target zone. Bears shouldn't consider such a test a done deal due to the NDX's lack of any sustained pattern within this broadening formation.

Annotated Daily Chart of the RUT:

The RUT also did not closely approach its 9-ema last week, although the chart now appears that it did. It did so today, and bounced strongly from the retest.

The RUT has been in full-out breakout mode on this daily chart, even dragging the smaller grey channel outside that barrier, too. As mentioned last week, this set up a dangerous situation for bulls and bears alike.

Potential support converges from in the yellow-orange rectangle. A sharp downward move or a sustained pounding at the support would likely be necessary to break through that support on daily closes. The Cyprus situation provided enough of a sharp downward thrust to head the RUT down toward that 9-ema but not to break it below it. Yet. Like the other indices, the RUT sank back off the afternoon high as sellers returned or perhaps buyers lacked enthusiasm.

Bulls want to see the rally pattern reinstituted, with a strong gain over a day or two followed by sideways action for 3-5 days. If that pattern doesn't unfold, upward momentum might be waning, as it must do some day. That might send the RUT back into a retest of that converging support.

If that support is broken on sustained daily closes, the next potential Keltner downside targets are marked. A rising trendline that I have not included also crosses just above 920. Bear should protect profits in that zone, too, if the RUT should drop that far.

Like the Dow, the RUT has already set a new upside target on its weekly chart, with several weekly closes above the barrier setting the next target. That target is about 1025. However, also like the Dow, the RUT has for the last four years become more volatile, both to the upside and the downside, as it's broken out of the boundary setting that new target. During those four years, it has not then tended to follow through to reach the target on the weekly chart. It's not that it can't reach that next target. It has in other years. However, it's time for some wariness and some expectation of possible increased volatility.

Annotated Daily Chart of the DJT:

Everything that was said of the RUT can be said of the Dow Jones Transports: earlier this year, the DJT broke out of its widest Keltner channel and screamed higher, pulling the grey Keltner channel out into runaway territory, too. This is a time of danger to bulls and bears alike, although bears have faced the brunt of the danger until now.

Potential support levels are marked, but we watch this index as a benchmark and not as a trading vehicle. Bulls want to see the DJT continue to find support on daily closes at the 9-ema or grey channel support, as it did today. They want today's retest to be followed by a strong gain and then 3-5 days of sideways movement before another retest of the 9-ema. If the DJT fails to follow this pattern, upward momentum may be waning. If it rolls through the 9-ema and dips to the grey channel support, they want to see it bounce back above the red 9-ema within a few days.

Tomorrow's Economic and Earnings Releases

I've carried through Jim's chart from this weekend, but to tomorrow's events, we must now add the Cypriot parliament's decision.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Potential short-term support and resistance levels are marked on the SPX's 30-minute chart. Most significant resistance on 30-minute closes groups from about 1561-1565, but we knew already that zone could serve as resistance on 30-minute closes. We didn't need to look at a Keltner chart to determine that. The most significant nearby support on 30-minute closes now groups within the highest red rectangle. We see that the SPX pierced the Keltner lines making up the potential support this morning but did not close 30-minute periods below it. Support held. This afternoon, prices again dipped to that converging support, but the support held, so far, on 30-minute closes.

A failure of that support to hold on consistent 30-minute closes tomorrow sets a potential downside target at the lowest red rectangle. Bears should be aware, however, of potentially strong support at or near today's 1545.13 low.

The SPX's rally pattern of consistent 30-minute closes at or above a rising red 9-ema began breaking apart late last week. That action flattened the 9-ema, showing that momentum was waning, at least temporarily. If the SPX establishes a pattern now of chopping back and forth across a flattening 9-ema, as it did today, bulls and bears alike need to be aware that it's consolidating prior to another move, with that next move's direction not known.

If the SPX should break through resistance on consistent 30-minute closes, the 60-minute chart (not shown) sets a potential upside target of about 1572. However, we knew that, too, without looking at Keltner charts, didn't we?

Annotated 30-Minute Chart of the Dow:

The Dow not only flattened its red 9-em on this 30-minute chart last week: it turned it lower. Today the Dow dipped to test next support but, like the SPX, closed 30-minute periods above it. Support held and the Dow into late afternoon when it again sank toward support. Even while gaining, the Dow could not institute a new sustained rally pattern even on the 30-minute chart. It should be considered vulnerable to another possible support test at the highest red rectangle. If that support should fail on consistent 30-minute closes, the next potential downside target is marked.

With the Dow chopping back and forth across the 9-ema today, that moving average is temporarily rendered less useful as a benchmark. Bulls should of course be watchful of potential resistance on 30-minute closes at the potential resistance levels grouped near the 9-ema. Next potential resistance marked by the top yellow-orange rectangle gathers thickly just where it would be expected. That resistance looks strong, but if the Dow should break through it on consistent 30-minute closes, the 60-minute chart (not shown) suggests the next nearby upside target would be about 14,560-14,580.

Annotated 30-Minute Chart of the NDX:

As has often been true of the NDX the last few months, the NDX's behavior was an outlier when its performance on the Keltner charts is compared to the other indices. The NDX opened below the Keltner potential support that the other indices tested in the first 30-minute period, rather than opening and falling down to that test. The NDX bounced hard, as did the other indices, and it did manage a first 30-minute close at the lower boundary of the potential support. It then bounced above that support, but its behavior certainly didn't show the same clear-cut initial "support held" behavior as seen in the previous two graphs Nevertheless, when the NDX sank off its afternoon highs, it held above support. A retest can't be ruled out. If potential support marked by the lowest yellow-orange rectangle should fail to hold on subsequent retests, the chart suggests a next potential downside target at the lower red rectangle. However, today's 2,767.48 low must be considered potential support, too.

Neither can a jump up to next resistance be ruled out. That potential resistance on 30-minute closes can be found at the top yellow-orange rectangle. That configuration of resistance has held through the last five days, but if prices should break through it on consistent 30-minute closes, the next nearby potential upside target can be found at the green rectangle.

Annotated 30-Minute Chart of the Russell 2000:

The RUT pierced the potential support zone marked by the lower yellow-orange rectangle this morning but bounced right away and sustained 30-minute closes above that zone until the selling or buyers' strike hit in the afternoon. Support held on both the initial test and in this afternoon's decline. If the RUT should be able to resume a rally pattern on this chart, it will soon hit potentially strong resistance on 30-minute closes at the zone marked first by the red 9-ema and then by the top yellow-orange rectangle. If the RUT should break through that top yellow-orange rectangle on consistent 30-minute closes, it will be necessary to watch the RUT's behavior with respect to a rising red 9-ema to gauge strength or change in trend. The RUT has broken through all upside targets on everything up through its daily chart.

If the RUT should roll over again, the support zone tested today is the first potential downside target. If support there should be broken on sustained 30-minute closes, the next downside target is marked on the chart at the lower red rectangle.

To sum up, the Cyprus situation provided the catalyst for support retests that were long overdue. The indices bounced immediately from those tests and then sellers either arrived or buyers stepped back this afternoon. Still, the daily closes were all at or above the red 9-ema's on daily charts. By that measure, we have not seen any change in bullish tenor yet on those daily charts. Now, however, the indices need to complete the rest of the bullish pattern . . . and quickly. Bulls need to see, at the least, consolidation with small-bodied candles at or above the support tested today, and would prefer to see actual gains. We saw the SPX try several times last week to push above the previous 1,565.15 closing high without success. If the rally pattern fails to institute itself quickly, bullish momentum may be waning.

Perhaps bulls will be so encouraged by today's behavior that we still have gains ahead of us and perhaps rabid gains. I'm thinking of the increasing price volatility in both directions seen in both the Dow and the RUT any time in the last four years that they broke above weekly channel barriers that they have again breached. I would be just as wary of a rollover and retest of the support levels tested today. What would have happened today if prices had dipped just a little lower or lingered just another thirty-minute period at the lows? All we know for sure is that, for today, nothing changed in the typical rally patterns. On the surface, given the fear in the markets at the open, that might be considered bullish, but I'll wait until I see what develops over the next few days before I make too many decisions.