Market Internals


Asian and U.S. investors and traders were in the mood to take profits today. European markets were closed for Easter Monday. Disappointing rates of growth in reported manufacturing numbers in China and the U.S. took the blame. However, momentum had been slowing over the last week even as U.S. indices stretched for and achieved new closing highs.

The SPX fell 0.45 percent; the Dow, only 0.04 percent; and the NDX, 0.77 percent. The RUT tumbled 1.34 percent, and the SOX, an even deeper 2.03 percent. The Dow Jones Transports dropped 1.49 percent.

With the dollar weakening as well as other factors, gold futures for June delivery gained 0.3 percent today, settling at $1600.90 per ounce. Platinum gained 1.5 percent. The disappointment in manufacturing data may have led to May silver futures falling 1.3 percent and copper declining 0.8 percent, experts believe.

March gasoline prices dropped, the first time since 2003 that March's prices have been lower than February's. Crude futures dropped, too, with some experts speculating that the dollar's decline helped minimize today's decline.

Monday's Developments

Asian bourses eased. Although one news source characterized the Bank of Japan's important tankan survey as showing business sentiment rising in the first quarter of 2013, that wasn't the whole story. That reported number was an improvement from a more negative number to a less negative one, from -12 to -8. Experts had predicted a rise to -7, so the number was a disappointment. The non-manufacturing portion rose to 6 from a previous 4, but experts had predicted a rise to 8.

Japan's new fiscal year began today. The Nikkei 225 fell 2.12 percent, and the Straits Timex, a more modest 0.02 percent. The Hang Seng was closed. China's Shanghai Composite dropped 2.23 percent. Bloomberg calculates that this index is down 1.42 percent year-to-date. China's March PMI pointed to the fastest factory output in almost a year, but the reading was still below expectations.

European bourses were still closed for the Easter holiday. Today, Russia's First Deputy Prime Minister, Igor Shuvalov, announced that his country's government will not offer aid to businesses that lost money in Cyprus unless that business is in part held by the Russian government. Those cases will be considered individually. While Russia protested to the Cypriot government about the appropriation of hefty portions of deposits over 100,000 euros for use in meeting bailout requirements, Russia's ultimate goal is to repatriate monies that are being sent to supposed safe-haven countries.

Today's U.S. developments started out with Markit's final manufacturing PMI. The 54.6 headline number disappointed. The prior flash number had been 54.9, and the final number had been expected to inch higher to 55.00.

February's final Markit PMI had been 54.3, so March's number was still stronger by comparison. Markit's summarization was "strong growth of manufacturing output, supporting faster rise in employment." Bullet points noted that although the rate of increase eased to a three-month low, the headline number indicated a healthy rise in output. March's rate of job creation accelerated. In addition, input price inflation slowed to its lowest level since last September. New orders showed expansion, but the rate of that expansion did not change. New export orders rose from a below-50-benchmark 48.5 to 51.8. The only March component below the 50.0 benchmark was suppliers' delivery times. Those delivery times were lengthening at a faster rate, Markit reported.

Soon after that came another important release related to manufacturing. Its evidence proved contradictory to the Markit survey in some aspects. The headline number's disappointment proved a stronger prompt to investors and traders ready to take profits.

March ISM Manufacturing dropped to 51.3 percent. Experts had predicted a slight easing to 54.0 percent from the prior 54.2 percent. ISM Manufacturing Prices also dropped, to 54.5 percent. Experts had predicted that number would ease slightly to 60.1 percent from the prior 61.5 percent.

Looking beneath the headline number, contracting inventories contributed to the disappointment. As was seen with the Markit number, new orders, production and employment all grew. Where the ISM differed was in the rate of growth. Anything over 50.0 percent indicates growth in manufacturing, so ISM's conclusion was that growth continued, "albeit at a slower rate."

The employment component rose from February's 52.6 percent to 54.2 percent. As was seen with the Markit survey, the prices component dropped. In this case, that component fell 7 percentage points, dropping to 54.5. Another difference from the conclusions reached by the Markit survey was found in the component measuring suppliers' deliveries, however. ISM concluded those deliveries were faster, not slower.

Three industries reported contraction. Those included petroleum and coal products, chemical products and machinery.

February's Construction Spending also surfaced thirty minutes after the open. The prior report had shown spending declining 2.1 percent, and this one was expected to rise to 1.1 percent. The Department of Commerce reported the number rising to 1.2 percent, slightly higher than expected. The department noted that this number is 7.9 percent above the year-ago level. Private construction rose 1.3 percent; residential, 2.2 percent, and nonresidential construction, 0.4 percent. Public construction figures showed gains of 0.9 percent, and highway construction surged up by 3.4 percent. Educational construction dropped 0.3 percent, however.

Moody's weekly Survey of Business Confidence also was reported during this time period. The prior report had been 33.3, and this reported eased to 32.3.

Novartis AG (NVS, 71.06, down 0.18 or 0.25 percent) led the list of story stocks today due to a court decision in India. At issue was the patent protection in India of the pill form of the company's cancer drug Glivec. The company claimed that a new patent was warranted because the originally patented formulation could not be made in pill form. India's laws ban "evergreening," slight changes to a formulation for the purpose of extending a patent and keeping cheaper generics from coming to the market. The international TRIPS agreement, part of the agreement forming the World Trade Organization, allows an exclusion to patent law of "inventions the prevention of whose commercial exploitation is necessary to protect ordre public or morality" and "diagnostic, therapeutic and surgical methods for the treatment of humans or animals," along with other exclusions. About 40 other countries have granted the new patent, but India is of particular interest. Glivec is too expensive a drug for most poor patients to afford, but the company argues that it provides the drug free to many indigent patients. Currently, India comprises the 14th largest domestic drug market, but an exploding population means that annual growth is projected at 13-14 percent, so drug companies want to market their drugs to India.

Tesla Motors (TSLA, 43.93, up 6.04 or 15.94 percent) raised guidance for its first quarter due to better-than-expected sales of its Model S car. The company now expects to report a profit on both a GAAP and non-GAAP basis. The company had previously said it would make a profit when some costs were excluded. The company will not produce the small battery option for the car since so few customers wanted to add the battery pack. Today's gain was made on more than eight times the three-month average daily volume, and I suspected why when I saw that higher-than-normal volume. The short float was 44.51 percent. Will want-to-be investors step in now that shorts have been forced to cover?

Micron Technologies (MU, 9.38, down 0.60 or 5.96 percent) had a bad day. General market weakness contributed, of course. However, the stock price also appeared to be reacting to news that Elpida's future as a subsidiary of MU might be threatened by a suit filed by unsecured creditors in in a Tokyo court.

Apple (AAPL, 428.92, down 13.75 or 3.11 percent) dropped hard on confirmation that a Pacific Crest Securities analyst was lowering estimates for large-format iPads ahead of the introduction of the expected new products. Blackberry (BBRY, 15.11, up 0.66 or 4.59 percent) benefited, bucking the trend on a negative day and gaining.

Michael Dell bargained with Blackstone Group LP (BX). He said that only if the group guarantees he can stay as Dell's (DELL, 14.30, down 0.03 or 0.21 percent) CEO will he consider getting behind their buyout offer. According to a Reuters article, Michael Dell did not inform Silverlake, who thought he was backing their joint bid, that he was meeting again with Blackstone.

Insurers such as Aetna (AET), WellCare Health Plans (WCG), UnitedHealthGroup Inc. (UNH) and especially Humana Inc. (HUM, 75.02, up 5.91 or 8.55 percent) rallied to an exciting close today if you happened to long one of their stocks. The Centers for Medicare and Medicaid Services (CMS) was due to announce Medicare Advantage rates this afternoon after the close, and insurers appeared to believe--or shorts feared--that they would get good news. They hoped that a proposed 2.2 percent reduction will be rescinded. Under the section of the CMS release titled "Payments to Plans," the CMS stated that "the final estimate of the combined effect of the Medicare Advantage growth percentage and the fee-for-service growth percentage is 3.3 percent." After-hours trading saw further gains posted, and HUM last at $81.81.

As part of that release, the CMS announced that health care spending has been slowing. For the first time since the Part D program was initiated, the deductible for the "defined standard plan" will be lower. Since the Affordable Care Act of 2010's enactment, premiums have declined while enrollment has increased.

EBay (EBAY) benefited today from last Thursday's analyst day. The stock rose 2.75 percent to $55.71.

U.S. Bankruptcy Judge Christopher Klein today accepted the Chapter 9 bankruptcy application of Stockton, CaliforniaThat makes this city of almost 300,000 the largest U.S. city to file bankruptcy. . Bond insurers and others had protested the petition, saying the city hadn't made enough efforts to cut costs. The city owes $900 million to the California Public Employees' Retirement System.

The geopolitical situation escalates. With North Korea declaring this weekend that it was in a "state of war" with South Korea, U.S. F-22 fighter jets will join South Korea's military exercise named Foal Eagle. In addition, South Korea's President Park Geun-hye said that she will allow the military to exert its own judgment on replying to provocations without the necessity of checking back in with the central government first.

Let's look at daily charts and see the damage that was or was not done.


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:

As Jim Brown reported this weekend, the SPX finally achieved a new closing high last week. To fulfill bullish hopes, the SPX needed to build on those gains before it sank into a red 9-ema test and particularly before it dropped back to grey-channel support.

That didn't happen. Today, the SPX dropped straight into a 9-ema test, also testing its mid-March swing high. The SPX closed the day successfully holding above the 9-ema. The index technically maintains its upside target, but damage was perhaps done to sentiment today, even if not to the chart formation. Short-term traders should know how their trades will perform if the SPX drops to test grey channel support or even support a bit lower, converging at the peach 45-ema and the top of the mid-March swing high.

In the event that marked potential support is tested and does not hold on consistent daily closes, lower potential downside targets are marked. Each of these also represents levels of potential support on daily closes.

If the SPX continues to climb, bulls want to see pullbacks find support on daily closes at the 9-ema, or at least at the grey-channel support. It's time to follow the SPX higher with stops on short-term long trades. Whether or not today's close was above the 9-ema, today's candle reversed all of Thursday's gains, creating a potential reversal signal. This often occurs as the SPX is consolidating gains after bouncing from the 9-ema, so it's not a promise of lower prices, but it does constitute a warning to be careful.

Annotated Daily Chart of the Dow:

Like the SPX, the Dow achieved another new closing high on Thursday. For the most bullish case, it, too, needed to build on those gains before it dropped into a red 9-ema retest and certainly before it retested grey-channel support.

On a Keltner basis, the early morning downdraft didn't hit the Dow as hard as it did the SPX. After managing another intraday high, the Dow managed to hold above its red 9-ema when it dipped. It did drop into a test of the mid-March swing high.

Support on a daily close did hold at the red 9-ema. Technically, the Dow maintains its upside potential, but it did so while created a doji candle on the daily chart. However, even if the Dow behaved rather well, other indices did not, and sentiment may have been damaged. Traders may be skittish and ready to take profit in the staid Dow stocks, too, as they did in the less liquid small caps today. Short-term traders should know how their trades will perform if the Dow should drop through that 9-ema and down into a grey-channel test.

In the event that potential support is tested and does not hold on consistent daily closes, lower potential downside targets are marked. Each of these also represents levels of potential support on daily closes.

If the Dow continues climbing, bulls want to see it find support on daily closes at a turning-higher red 9-ema, or at least at grey-channel support. It's time to follow short-term long trades higher with your stops.

Annotated Daily Chart of the NDX:

The NDX did not achieve a new record closing high on Thursday, although it did more closely approach its October 4 closing high of 2845.97. Thursday's action pulled it up out of the top of the consolidation band in which it had been trading throughout most of March. Like the other indices, the fulfillment of the most bullish follow-up required that the NDX build on Thursday's gains before it tested the red 9-ema's support and certainly before it tested lower grey-channel support.

That isn't what happened with the NDX, either. Like the SPX, this index dropped straight into a 9-ema retest.

The NDX closed the day slightly below the 9-ema. Whether or not the NDX held above the red 9-ema is of little consequence lately as it has tended churn back and forth across this moving average. The NDX did, however, roughly maintain support at or within its most recent consolidation pattern. As has been true so often lately with the NDX, traders should probably examine how their short-term trades might perform on a test of the next marked upside target or the next marked downside one, and plan accordingly.

In the event that potential support is tested and does not hold on consistent daily closes, lower potential downside targets are marked. Each of these also represents levels of potential support on daily closes.

If the NDX climbs, short-term longs should prepare for possibly strong resistance at the marked yellow-orange rectangle.

Annotated Daily Chart of the RUT:

The RUT did not produce a new closing high on Thursday. Neither did it successfully break above the top of its recent consolidation pattern. As today opened, it needed to check both of those tasks off its list to fulfill the most bullish case.

If some of the other indices fell straight to a 9-ema retest, the RUT fell harder. By late morning, the RUT had dropped more than 2.6 standard deviations, a hard fall. An off-the-cuff rough estimation dredged up from my long-ago days as a physics major would be that only about 2 percent or perhaps less of trading days move more than 2.6 standard deviations.

The RUT dropped all the way to test the bottom of its grey Keltner channel, although not quite all the way to its mid-March swing high. It was close enough that the drop could be considered a test of that support, too.

The support held, but it's obvious that somebody was dumping the small caps today with the "window washing" exercise that Jim Brown mentioned in this weekend's Wrap. That, more than anything that happened on the other indices, heightens concern. Looking at the chart, it's possible that this was just a sharper-than-normal pullback within a bull-flag type channel, but, if so, bulls need to see the RUT producing closes back above the red 9-ema within a few days. Bulls must consider at the possibility that this average will now be resistance on retests.

Traders should also know how their RUT-related trades will perform if the RUT were to drop to the peach-colored 45-ema. This is a possibility if the RUT has another hard-down day in the next few days.

In the event that lower potential support is tested and does not hold on consistent daily closes, additional lower potential downside targets are marked. Each of these also represents levels of potential support on daily closes.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports, the $DJT, proves useful to watch to determine the underpinnings of the market. Strongly performing transport companies mean the economy is moving forward. Sometimes the transports move ahead of a recovery or ahead of a decline. This index is not optionable, so it's not a trading vehicle but a bellwether index.

Last week, the $DJT appeared to be setting up a possible bearish formation, but it broke through to the upside on Thursday. Unlike its sister index, the $DJT did not produce a new closing high on Thursday, but bulls or bears forced to buy-to-cover their shorts contributed to an almost one percent gain on Thursday. That gain and more were erased by mid-morning today.

The $DJT did not recover the support of the red 9-ema by the close, but it was not so far away that the average's support cannot be reclaimed tomorrow. Those watching this index for guidance should watch whether that moving average is now consistent resistance on daily closes. The threat is that the $DJT is reshaping the bearish formation that it appeared to negate late last week. A drop to grey-channel support or even to the peach-colored 45-ema converging with historical and round-number support at 6000 looks at least as likely as any bounce beyond Thursday's high.

In the event that potential support does not hold on consistent daily closes, lower potential downside targets are marked. Each of these also represents levels of potential support on daily closes.

Tomorrow's Economic and Earnings Releases

This week's important economic events are carried forward from Jim Brown's weekend Wrap.

Also, tomorrow, Italian President Giorgio Napolitano's group of ten "wise men"--no wise women apparently available in Italy--will announce details of the urgent reforms that might be palatable to all parties. Their task is to avoid political deadlock as President Napolitano turns over the reins on May 15. Reforms are likely to include reforms of electoral law to prevent the current deadlock from occurring again and cost-cutting measures.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Today's action dropped the SPX to its 30-minute 120-ema and almost to the lower boundary of its intermediate-sized purple Keltner channel. A drop below these two on sustained 30-minute closes would have put the SPX into short-term bearish mode. Traders should remain alert to the possibility that the SPX could drop further into that potential support tomorrow morning. If that support should be breeched on sustained 30-minute closes, the next potential downside target is set. That next potential Keltner support is far below, so bulls want that support to hold, if retested. If that Keltner target looks too low to be reached in one fell swoop, you'll notice from an examination of the RUT's chart later that it's not.

A potential next upside target is marked if the SPX bounces and can maintain 30-minute closes above the red 9-ema. Watch for sustained 30-minute closes above the 30-minute red 9-ema to reinforce the sustainability of any bounce, if such a bounce should occur. This chart does not provide a strong prediction as to which action--the bounce or the downturn to retest today's lows--is most likely to occur.

Annotated 30-Minute Chart of the Dow:

The Dow outperformed the SPX on a Keltner basis, but that's easy to do with only 30 big-cap and presumably more liquid stocks comprising the index. Today, the Dow found support on 30-minute closes at its peach-colored 45-ema. It did not closely approach either the green 120-ema or the bottom support of its intermediate-sized Keltner channel.

The Dow mostly sustained 30-minute closes beneath the red 9-ema, but it ended the day jammed up underneath it. Like the SPX, this ending leads to uncertainty about next direction. Were we just seeing shorts, burned one too many times, taking profit into the close? Those looking for a new short-term trend will want to see 30-minute closes at or above a climbing red 9-ema on rallies and closes at or below a falling red 9-ema on declines. This will help guide judgments about the sustainability of the move and the continuing viability of the next marked target.

Sustained 30-minute closes beneath the top red rectangle's support target the lowest red rectangle. The RUT's action today illustrates how quickly such a target can be approached, as unlikely as it looks from studying the chart.

Except in the most rabid moves, such as the RUT's 2.6 standard-deviation move this morning, prices tend to be contained with the purple channel's boundaries, however. Although the markets feel a little dicey right now, particularly to anyone who went into the day with an open RUT or SOX-related trade, we have no firm evidence as yet that anything like a rout is underway. We do have enough evidence to exercise caution.

Annotated 30-Minute Chart of the NDX:

The NDX spent much of the morning testing its green 120-ema, the central average that serves as a benchmark for bullish or bearish behavior, before falling below it in the afternoon. Further support lay below, at the purple channel's lower boundary, with most prices during normal trading behavior contained within that channel. The NDX underperformed the SPX and Dow by this Keltner measure. Only a late day bounced saved it from closing right on the channel's lower boundary.

Sustained closes beneath the bottom yellow-orange rectangle target the zone marked by the red rectangle, but bears should be aware that support may be strong at that boundary. If prices cut right through it, as they did with the RUT today, be aware of that much lower potential target.

Today, the NDX's 9-ema did serve as a good benchmark of whether the NDX was in a sustained decline with continued 30-minute closes at or below that turning-lower moving average. If the NDX can break back above that average tomorrow, bulls will want to see sustained 30-minute closes at or above a turning higher red 9-ema and should then watch for potential resistance at the zones marked by rectangles.

Annotated 30-Minute Chart of the Russell 2000:

This is what can happen when the purple channel's boundaries are violated on 30-minute closes. The move toward the next target can sometimes be swift. While the RUT did not drop all the way to the pushed-lower boundary of the widest Keltner channel, it did drop close to the original target set when the RUT first broke down. I use rectangles to mark zones around potential support or resistance because we shouldn't count on one specific dollar and penny amount as the support or resistance.

Unless the RUT can sustain 30-minute closes above the red 9-ema, it risks another drop to test that lower Keltner channel boundary. That boundary now closely coincides with the mid-March swing high seen on the RUT's daily chart. If the RUT declines again, especially if it drops below the lowest support visible on this chart, watch how it performs with respect to the red 9-ema for information about whether the decline is sustainable or looks questionable.

If the RUT bounces tomorrow and can maintain 30-minute closes above a turning-higher red 9-ema, various potential next targets are staggered at regular intervals. It appears that some damage might have been done to sentiment among RUT traders today, but we've seen amazing recoveries before in this long move higher.

What do I think? When we look at the SPX and Dow, in particular, nothing much happened other than routine pullbacks. The most worrisome aspects of their performances lay in the fact that they are not quite following through on their strongest rally patterns. While that failure certainly deserves attention, it's not proof of anything just yet. That behavior just warns us to pay attention.

However, the greater percentage losses on the RUT and $DJT, as compared to other indices, heightens worries about the underlying strength of the markets. So does the worse damage done on Keltner charts. Advance/decline and up/down volume figures proved much more market-negative on the RUT 2000 than on indices such as the SPX, too.

The RUT and $DJT can sometimes lead the others. It's time to keep these indices on your radar, no matter whether you trade the RUT or are used to watching the $DJT. Someone was dumping their component stocks today, and whether that was smart money divesting itself of the less liquid RUT components, in the RUT's case, or just a rebalancing portfolios, we don't yet know. Both these indices can overrun boundaries. Care is needed. Plan how you'll adjust or where you'll exit for both up and down scenarios. It's certainly time to prepare and plan.