Market Internals


This weekend, the Group of 20 assured the world that their stimulus policies would focus on promoting growth rather than bearing down on austerity measures. Overnight, some indices such as the Nikkei 225, DAX, and the FTSE 100, stretched toward recently achieved five-year highs, but new five-year highs were not to be produced today on those indices. Market watchers found their new five-year highs on U.S. bourses, however. The SPX, OEX, and RUT all hit new intraday highs by mid-morning, and all closed on new highs.

The SPX rose 0.20 percent; the Dow, only 0.01 percent; and the NDX, 0.34 percent. The RUT gained 0.28 percent, but the SOX lost 0.21 percent. The Dow Jones Transportation Index dropped 0.13 percent. Financials have been strong gainers since the earnings season began, and the KBW Bank Index posted a 0.98-percent gain today. The Dow Jones U.S. Home Construction Index (DJUSHB) dropped 1.72 percent, however, hurt by a disappointing economic release. Bonds climbed early today but then lost some steam, with ten-year yields dropping to 2.488 percent from the prior 2.491 and thirty-year yields dropping to 3.555 percent from the prior 3.572.

Metals climbed while crude (/CL) dropped. Gold (/GC) for August delivery settled at 1336.0, up 43.1 points. Silver (/SI) for September delivery settled at 20.509, up 1.049. Copper (/HG) for September delivery settled at 3.1850, up 0.450. The expirations quoted are chosen from the contract with the most volume. Crude for September delivery settled at 106.94, down 0.93.

Monday's Developments

Asian bourses climbed last night after Japanese elections appeared to support Japanese Prime Minister Shinzo Abe's stimulus programs. The Nikkei 225 gained 0.47 percent; the Hang Seng, 0.25 percent, and the Straits Times, 0.66 percent. China's Shanghai Composite climbed 0.61 percent.

In Europe, Germany's Bundesbank forecast a rebound in economic growth for the second quarter but saw increasing chances of slowing economic growth in the third quarter. As a result, the central bank lowered its growth forecast for Germany's economy in 2013 to 0.3 percent from the prior 0.4 percent. The central bank also trimmed its 2014 growth forecast to 1.5 percent from the prior 1.9 percent.

European bourses turned in mixed performances. The FTSE 100 declined 0.17 percent; the DAX was flat, down 0.01 percent; and the CAC 40 rose 0.37 percent. Spain's IBEX 35 rose 0.29 percent, and Italy's FTSE MIB climbed 0.68 percent.

Today's U.S. economic calendar started with the June Chicago Fed National Activity Index. The prior report had measured -0.3 but was revised slightly higher to -0.29. The consensus average for the current number had been 0.03 with the range from -0.20 to 1.00. The actual number was within the range but below the consensus average, at -0.13. However, the three-month average increased from a revised prior -0.37 to -0.26.

The Chicago Fed characterized June as "another soft month," but noted the obvious, that the number was less negative than it had been in the prior month. Production and employment both contributed to the improvement, and those are important components to any recovery. Consumption and housing and sales/orders/inventories worsened, however.

June Existing Home Sales followed shortly after the market open. Industry experts expected sales to rise to 5.27 million from the prior 5.18 million, but sales disappointed. The National Association of Realtors reported annualized sales, excluding new construction, at 5.08 billion. In addition, May's sales were revised lower to 5.14 million. Still, comparisons to year-ago levels show double-digit increases, at 15.2 percent growth when compared to June 2012. Also, Freddie Mac recently reported that the June national average commitment rate for a 30-year conventional, fixed-rate mortgage rose to 4.07 percent from a prior 3.54 percent.

Home sales declined in all regions when compared to May but were all higher when compared to year-ago levels. Total housing inventory rose, as did the months of supply at the current sales pace. Listed inventory still remains below year-ago comparisons, and the national median existing-home price is 13.5-percent higher than the year-ago level.

Distressed home sales have dropped to the lowest percentage of all sales seen since October 2008, when the figures first started being tracked. However, some anecdotal evidence outside of this report has surfaced that, with mortgage rates rising recently, home buyers have been reluctant to be tied up in buying a bank-owned home when the bank might take weeks if not months deciding whether to accept an offer. Committed buyers may want to lock in rates before they rise and not wait on a bank to make a decision.

Median days on the market decreased to 37 days from the prior 41 days. Median days on the market had measured 70 days a year ago.

Moody's weekly Business Confidence Survey dropped to 27.1 from the prior 28.8. In late June and early July, this number had dropped below months-long support at 28. The weekly result had popped back above 28 last week, only to succumb to below-28 levels again this week. Moody's summary of business sentiment still uses the terms "sturdy" and "consistent with growth at the high end of the economy's potential," however. In fact, the summary brightened this report with the news that future expectations are outstripping current conditions, which Moody's interprets as pointing to higher growth at the end of the year. Hiring remains soft, however.

Reporting companies included McDonalds (MCD). MCD disappointed on EPS. Reuters pegged the average expectation at $1.40 while MCD reported $1.38.

Same-store sales in the U.S. rose 1 percent, but analysts had expected 1.5-percent growth. U.S. sales grew to $6.91 billion against expectations of $7.08 billion, and they might also have disappointed when compared to year-ago sales. Europe's comparable sales dropped 0.1 percent, in line with expectations, and Asia/Pacific, Middle East and Africa's (APMEA) dropped 0.3 percent, a little more than the 0.2-percent-drop expectation. Operating income increased 5 percent in Europe but dropped 1 percent in the APMEA region. The company warned of a challenging environment for the year due to declining sales in Europe and competition in the U.S.

Halliburton (HAL, 45.08, down 0.75 or 1.64 percent) reported earnings of $0.73/share and revenues of $7.32 billion. Analysts had anticipated $0.72/share. That's a decline from the year-ago level of $0.79/share, however. The company will also increase its share buyback plan, it announced today.

Overseas sales were 16 percent for Europe, Africa, the Middle East and Asia. The company pegged Middle East/Asia as its fastest growing market and was optimistic about that market in the future. Revenue for the region increased 12 percent in this report, and the company forecast full-year growth in the mid-teens for that market. North American revenue grew 3 percent and margins increased to 17.5 percent. The company expects the U.S. land rig count to remain flat, but management believes that margins in North America will continue to increase.

Hasbro (HAS, 46.87, up 1.49 or 3.28 percent) missed on both EPS and revenues. The company reported adjusted earnings of $0.29/share on revenue of $766.3 million. According to one source, the company had been expected to report $0.35/share and $808.0 million. Strong year-over-year growth of 43.0 percent in the Girls category was offset by a 35-percent drop in the Boys category for that same period. The company mentioned tough comparisons due to major motion picture releases that had driven growth in the year-ago comparable period.

Year-over-year comparisons weren't happy when made across geographical regions, either, despite favorable currency moves. U.S. and Canada sales declined 4 percent and international sales fell 6 percent. The Asia-Pacific region declined the most.

Kimberly Clark (KMB, 97.68, down 1.81 or 1.82 percent) reported $1.41/share, beating its $1.39/share expectation. The year-ago comparison was $1.30. However, revenue dropped 0.04 percent to $5.27 billion. Revenue had been expected to measure $5.34 billion. The company's report mentioned 3 percent organic sales growth, pegging that sales growth more on international sales than on the developed markets that produced "mixed volume performance." The press release was also heavy on emphasis of the company's $80 million in cost savings and improvement in adjusted operating profit margin. The company reiterated its full-year expectations despite a larger-than-anticipated negative impact from a rising U.S. dollar.

Media and market solutions company Gannet (GCI, 25.87, down 0.49 or 1.86 percent) reported earnings of $0.58/share and revenue of $1.3 billion. Analysts had pegged expectations at $0.58/share and $1.33 billion. Those parsing the report noted declining revenue from newspaper ads. Broadcast and digital revenue rose, and the company is focusing on diversification into the broadcast sector. As was true of many reporting companies, GCI authorized a share buyback program.

After the close, Netflix (NFLX, 261.96, down 2.62 or 0.99 percent) dropped heavily in after-hours trading. At first glance--or first discussion--the problem appeared to be the rather wide guidance provided for the next quarter, coupled with an innovative platform for the conference call. Analysts thought the innovative new platform stymied their ability to ask questions and follow up if a concern turned up during initial questioning.

NFLX reported diluted earnings of $0.49/share, well above the expectation of $0.40/share. In addition, revenue of $1.07 billion matched expectations of $1.07 billion. Subscriber numbers appeared to disappoint some experts, however, because their growth was not spectacular. U.S. streaming subscribers increased to 29.81 million and international subscribers, to 7.75 million. Subscribers to the mail-in DVD service fell to 7.51 million from a prior 7.98 million.

That company issued guidance for the next quarter of $0.30-$0.56/share, with the prior average expectation at $0.45/share. Of course, the $0.43 average of the range is below the prior average but the concern seemed to extend beyond that single number. The wide range led some to speculate that some concern led to NFLX's inability to narrow the range.

Some analysts were concerned about NFLX's move to more original programming, mentioning the prohibitive cost of the programming. They look for more proof that NFLX can earn money on such programming.

As this report was prepared, the conference call had not yet occurred, and NFLX was at 258.00, down $20.43 or 7.80 percent from the live session close. Of course, by the time this report lands in email boxes, the conference call will have occurred, and analysts will either have had their concerns answered or their concerns heightened. We can't always count on the initial reaction following through at the open.

Texas Instruments (TXN, 37.42, up 0.16 or 0.43 percent) climbed in afterhours trading after reporting earnings. The company reported earnings of $0.58/share, with expectations pegged at $0.41/share. The company said higher demand for chips used in auto and communications customers led to the EPS beat. Revenue of $3.047 billion disappointed, however, with experts expecting $3.059 billion. The company pegged third-quarter expectations at $0.49-$0.57/share on revenue of $3.09 billion to $3.35 billion. Prior expectations had been $0.50/share on revenue of $3.2 billion.

Story stocks included Taiwan's Himax Technology (HIMX, 6.74, up 1.57 or 30.37 percent). Google (GOOG, 910.70, up 14.10 or 1.57 percent) has agreed to invest in Himax Display, a Himax subsidiary. The funds needed for production upgrades and other requirements related to producing liquid crystal on silicon chips and modules should close in the third quarter. Himax Display's chips and modules are used in applications such as Google Glass. In exchange for the funds, GOOG secures a 6.3 percent interest in Himax Display and has the option for a bigger stake.

Saks Inc. (SKS, 14.94, down 0.95 or 5.98 percent) dropped on volume almost four times average daily volume. S&P said the firm would be reevaluating SKS junk-bond credit rating. The company has been placed on watch for a possible downgrade.

Let's look at daily charts. Last week, chart setups suggested that indices could go higher, but they would likely need a buying crescendo to do so. They did go higher although no such buying climax was necessary after all.


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 continues to reach higher into the next resistance zone and closer to the potential upside target that has now risen above 1700. That next Keltner target would likely be pushed toward 1710-1715 on continued gains. In addition, a weekly upside target is within that range, too. Knowing that the SPX is fast approaching potential resistance on both daily and weekly charts and looking at the number of days of gains without a material pullback, be wary of the potential resistance that might kick in any moment.

Last Monday's article offered the same warning. Obviously, no pullback materialized, but that doesn't mean that we shouldn't weigh probabilities against possibilities and prepare what-if trading plans anyway.

Where might the SPX find support if it does pull back? According to Keltner channels, the closest potential support on daily closes extends from about 1663-1678.

Keltner channels suggest that if the SPX produces consistent daily closes below about 1663, it targets potential support on daily closes from about 1632-1652, with potential Keltner and historical support within that range. A failure to hold support in that range suggests a decline to the next target, marked on the chart.

Annotated Daily Chart of the Dow:

The Dow maintains a potential upside target that now extends from about 15575-15735. Unlike the SPX, its weekly potential upside target isn't within that range but rather is much higher at about 15890-15900. It's hard to imagine another 300+ climb without a pullback. It's not likely but not impossible, either.

Further gains are certainly possible, but at least prepare what-if plans for the possibility that resistance will kick in anywhere within this current potential resistance band. If resistance does roll the Dow lower, where might the Dow go? Potential support might kick in from about 15310-15457, with potential Keltner, historical and round-number support in that zone. If the Dow sustains consistent daily closes beneath that zone, next potential support would likely extend from about 15000-15130, where Keltner support would likely sink to meet historical and round-number support. A failure to hold support there would target the next marked potential support.

Annotated Daily Chart of the NDX:

Instead of charging up toward its next potential upside target, the NDX fell back within the potential resistance zone it's currently testing. Sustained daily closes above about 3085 would suggest that the NDX could charge up toward that next upside target at about 3110-3140. Failure to hold support on consistent daily closes below about 3037 would suggest that the NDX might tumble to the next marked downside target from about 2990-3016, where next support on daily closes might be found. Failure to hold support on daily closes above 2990 targets the next potential support zone.

Annotated Daily Chart of the RUT:

Since the RUT has broken out to the topside of the Keltner configuration on this daily chart, we have to turn to the weekly chart for a new potential upside target for the RUT. According to that chart, the RUT will maintain a potential upside target near 1075-1080 as long as it maintains weekly closes above about 1000. Since the RUT has broken through all targets on this daily chart, however, the setup should be considered a dangerous one for bulls and bears alike. The hope is that the pullback might be a sedate one when it comes, but the RUT has far outstripped its last peak highs, the most logical strongest support. It's possible that the pullback could be more sudden.

Where is potential support during a pullback? Keltner channels suggest that support might be found in a zone from about 1021-1038, where gap support and converging Keltner channel lines might be found. Keltner channels suggest that if the RUT fails to find support on consistent daily closes somewhere in that zone or at least by 1020, the next drop could be a harder one to test potential support that extends from about 994-1008. Failure to find support at or above about 994 targets the next potential support zone, marked on the chart.

Annotated Daily Chart of the Dow Jones Transports:

Coming into this week, the transports had eked out two daily closes just above the May closing highs, but those closes weren't impressively. In this indicator index, we wait to see more indications of what might come next. Now that the transportation index had spun its wheels just above the last peak, would it drive higher? Or would it drop back down the hill it had just climbed? It did neither today. Resistance as indicated by the purple Keltner channel line continues to hold on daily closes. It appears time for this index to fall back to test its rising red 9-ema. If it does so, it might give us clues as to whether other indices will find support nearby or will plummet through levels that should be support. If the transportation index drives higher instead, that gives us clues, too, or corroborates what we see on other indices.

Tomorrow's Economic and Earnings Releases

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

Companies reporting earnings tomorrow include AAPL (AMC), BRCM (AMC), DFS (AMC), DPZ (BMO), JNPR (AMC), PNRA (AMC), RSH (BMO) TRV (BMO), UPS (BMO), UTX (BMO), WEN (BMO), VLO (BMO) among many others. By the time trading opens tomorrow, futures will likely be reacting to AAPL's report with either relief or dismay.

What about Tomorrow?

This section will feature 60-minute rather than the typical 30-minute charts. Even on the more sedate and technically well-behaved SPX, most indices have been outrunning all Keltner targets on the 30-minute chart. It goes without saying that the RUT long ago ran through targets on the 30-minute chart.

Annotated 60-Minute Chart of the SPX:

For about two weeks, the SPX had been bouncing along the top of a sharply rising 60-minute red 9-ema. You can still see the pattern in the left-hand side of this 10-day chart. Beginning two Fridays ago, that pattern began breaking a little, with the SPX for a time producing 60-minute closes below the moving average. The SPX then reestablished a pattern of 60-minute closes at or above a red 9-ema that had turned higher again. The SPX also managed closes at or above the outside of its widest Keltner channel. It, too, threatens to run up in momentum mode, but so far the closes outside the widest channel have been only minimally outside it. The SPX has not yet escaped the gravitational pull of those channels.

Consistent 60-minute closes above about 1697 signal that the SPX has joined the RUT in a momentum run higher, although the SPX will soon slam into daily and weekly potential resistance, too. Consistent 60-minute closes below about 1689 set a next downside target from about 1679-1684. Lower potential targets are marked stair-stepping down from there, to be considered potential targets if the next higher level fails to provide support on 60-minute closes.

Annotated 60-Minute Chart of the Dow:

Like the SPX and many other indices, the Dow had, for about two weeks, been springing up along a rising 60-minute red 9-ema until two Fridays ago when that pattern failed. A number of 60-minute closes were below the 60-minute 9-ema, and that average began flattening. The Dow did not recover as quickly as the SPX did. Despite climbing from last Monday until today, reaching a new high last Wednesday, the pattern has never reinstituted itself as strongly as the original pattern. Recently a number of closing has been under the 9-ema, and the 9-ema has flattened again. This is visual evidence that the run is stalling but not proof of next direction.

The relative weakness with respect to the SPX also shows up when comparing the distance from the outer Keltner channel. The SPX scrambled above the upper boundary: the Dow hasn't reached it. Moreover, the Dow appears to be struggling with the upper boundary of the next widest channel, represented by the purple channel line.

Sustained 60-minute closes above about 15592 set a potential upside target of about 15620-15670. Sustained 60-minute closes beneath about 15545 suggest a potential downside target of 15450-15510. Subsequent downside targets are marked in case that support fails on consistent 60-minute closes.

Annotated 60-Minute Chart of the NDX:

Once the NDX began chopping back and forth across a flattening 9-ema two Fridays ago, it never really regained its momentum despite continuing to post slightly higher highs. The Keltner pattern suggested that the rally pattern had weakened, and then the NDX fell through to next support last Friday. An attempt to climb today did not succeed in springing the NDX out of its current smallest (grey) Keltner channel's boundaries or even turn that channel higher. What we're seeing right now is consolidation or noise. Perhaps that's to be expected ahead of AAPL earnings tomorrow.

The breakout could drive prices in either direction. Consistent 60-minute closes above about 3062 suggest that the NDX could again reach for the 3075-3095 zone, where it will again encounter potentially strong resistance on 60-minute closes. Consistent 60-minute closes below about 3075 suggest at least a short drop toward 3015-3031, where potentially strong support on 60-minute closes might exist. The Keltner setup suggests that a failure to hold support on 60-minute closes above about 3015 will target a drop all the way down toward 2940-2960, but we must of course note the potential gap, historical and round-number support near 3000. I've seen Keltner targets hit so often that I don't discount them, but unless there's a real run-for-the-exits feeling to a decline, it's hard to imagine that 3000 won't prompt at least an attempt to buy the dip. With this Keltner setup, I would not personally automatically go long at 3000 but would wait to see whether a buy-the-dip bounce was sustained.

Annotated 60-Minute Chart of the Russell 2000:

The RUT is still doing the best job of skipping higher along a still-climbing red 9-ema. After the weakness seen two Friday's ago, the RUT reestablished its recent rally pattern. One of two things has to happen before there's even the slightest change in tenor: the RUT either has to chop back and forth across that red 9-ema long enough to flatten it and show that the RUT is consolidating or the RUT has to sustain 60-minute closes below about 1048 long enough to flatten the red 9-ema and then turn it lower.

Sustained 60-minute closes below about 1048 suggest a target near 1035-1045. A failure there on sustained 60-minute closes sets a new potential downside target near 1020-1025.

We have to look all the way to the weekly target for an upside target for the RUT, that target up near 1070. Reaching that, of course, does not require any change in tenor.

Cries of "overbought" dampened the celebratory mood today but only a little. We cannot deny the possibility that prices will continue higher, even perhaps including a buying climax or even a more staid sideways-up long consolidation. Bears need to have their just-in-case scenarios written out for either of these cases. At what point would bearish short-term, medium-term or longer-term trades incur too-steep losses or show the trader that they're just not going to work?

Bulls don't escape this kind of planning, either. Probability suggests that they certainly need to have our just-in-case pullback scenarios written out. What kind of a pullback can short-term, medium-term and long-term trades sustain? What marks a decline stronger than the trader or investor want to sustain in those trades? How would a pullback progress so that the trader or investor felt comfortable that it was nothing more than a pullback to digest gains?