Market Internals


Today, Dallas Fed President Fisher said that Americans would be subjected to a cacophony of voices about Fed policy, with many Fed speakers lined up this week. He wasn't going to add to that cacophony, he said. Then he proceeded to do just that. A distillation of what he offered is a warning that we shouldn't believe the ultimate decision last week was an accurate reflection of the discussion.

That cacophonous chorus from him and other Fed speakers roiled the markets. Let's see the end-of-day results and then scan what else was said and reported before looking at the chart evidence produced.

The SPX dropped 0.47 percent; the Dow, 0.32 percent; and the NDX, 0.17 percent. The RUT lost only 0.06 percent, but the SOX dropped 0.38 percent. Banks responded to today's Fed speakers and a negative Financial Times piece about Citigroup (C)by declining, with the BKX, the KBW Bank Index, dropping 1.64 percent.

Yields dropped and bonds gained. Ten-year yields closed at 2.7140, down 0.0180 or 0.66 percent, and thirty-year's closed at 3.7420 percent, down 0.0180 or 0.48 percent.

After a CFTC report that showed hedge funds cutting back on their bullish bets on gold (RANsquawk), gold futures for December delivery (/GC) settled at 1326.9, down 5.6 points. Economist Nouriel Roubini (Dr. Doom) also said he was bearish on gold. He said he is overweighting equities, especially those of advanced economies such as ours, instead of bonds or gold or equities in emerging economies. Copper futures (/HG) for December delivery settled at 3.2985, down 0.220 points. Silver futures for December delivery settled at 21.857, down 0.70.

Crude futures (/CL) for November delivery (the highest volume contract today) settled at 103.59, down -1.16. WTI crude futures also dropped. Iran's moderate president appears interested in and has reportedly received permission from religious leaders to meet with President Obama. Whether or not that meeting occurs, that, as well as predictions that crude drawdowns may not be as deep as previously thought, contributed to the weakness. It was thought possible that more supply could eventually come onto the market.

Monday's Developments

What were some of the other influences on the markets?

This weekend, Syria's President Bashar Assad disparaged France, Britain and the U.S., claiming that they have made Syria an "imaginary enemy," according to an interview posted on CCTV's site and widely followed elsewhere. While assuring the world that Syria will uphold any agreement the country has signed, he said Western powers had interfered. In another interview on the same site, President Assad argued that he is not willing to negotiate with armed rebels. He again proposed the argument that it had been rebels who had used the chemical weapons and bragged that Russia and China would protect Syria from too much Western interference. The UN resolution is still being hammered out, with Russia objecting to initial language that would impose certain consequences if Syria does not turn over its chemical weapons.

However, some progress has been made, although it's impossible to ascertain how trustworthy that progress has been. Syria has already turned over information about its arsenal of chemical weapons, the Organisation [British spelling] for the Prohibition of Chemical Weapons said this weekend.

Last night, the September HSBC preliminary Composite PMI for China beat expectations, rising to 51.2 from August's 50.1. Market watchers had hoped to see a rise to 50.9. That 51.2 ranked as the highest number in six months. Output rose to 51.1 from August's 50.9, marking a five-month high according to Markit's summary. Output, new orders, new export orders, backlogs of work, output prices, input prices, stocks of purchases, stocks of finished goods, quantity of purchases and supplier's delivery times all increased. Employment, however, decreased. The final number will be released in about a week.

Despite the seeming good news, Asian bourses turned in mixed performances. The Nikkei 225 was closed for a holiday. The Hang Seng dropped 0.56 percent, and the Straits Times, 0.72 percent. China's Shanghai Composite jumped 1.33 percent, however.

German elections were held yesterday. Articles touted the landslide win of German Chancellor Angela Merkel's CDU party. However, as of this writing, it appears possible that her coalition of parties did not quite pull together the needed majority of votes. Germany's Finance Minister had commented that that Merkel's CDU/CSU-FDP coalition would need to seek further coalition parties. Although the Greens and Merkel's coalition have both previously rejected the idea of forming a coalition to govern together, the finance minister posited the theory that the CDU would likely seek a coalition with the Greens, perhaps enough to swing Merkel's coalition into a majority. Others believe that she will seek a coalition with the Social Democrats, the euro-skeptic SPD party, traditionally at odds with the chancellor's coalition. A Grand Coalition with challenger Peer Steinbrueck, of the SPD party, or, alternately, the Greens Party would perhaps force some moderation of either strict austerity rules or the makeup of the Eurozone going forward, depending on the coalition formed. Perhaps such a Grand Coalition won't force too much moderation, however. In an interview reported by Bloomberg, Chancellor Merkel said, "We cannot prematurely drop the pressure to reform."

In addition, September's Flash Composite Manufacturing Purchasing Manager's Index for the Eurozone rose to a 27-month high, to 52.1 from the prior 51.5. That strength came from the services sector, also hitting a 27-month high, rather than manufacturing, which disappointed. On a quarterly basis, Markit also termed the expansion the highest since the second quarter of 2011. Although September's manufacturing PMI disappointed, the quarterly results didn't. Markit said that manufacturing also produced its strongest quarter since the second quarter of 2011. It termed the gains seen as "broad based." Markit's chief economist, Chris Williamson, commented on "growing signs that the region is recovering from the longest recession in its history," but he did note that employment continued to fall, although it fell at a slower pace than previously.

European bourses turned lower, influenced by uncertainty over the eventual coalition to be formed in Germany and responding to early U.S. market weakness. Market participants weren't reassured by the composite PMI's upside surprise, perhaps, when manufacturing did not turn in as strong a showing, nor ECB Mario Draghi today repeating his "whatever it takes" stance on easing. The FTSE 100 lost 0.59 percent; the DAX, 0.47 percent; and the CAC 40, 0.75 percent. Spain's IBEX 35 dropped 0.68 percent, and Italy's FTSE MIB, 0. 32 percent.

Of course, our political and economic machinations influence the markets, too. The debt ceiling debate heats up as the end of the month approaches, with both sides of the aisle blaming the other for obstructionism and both sides catastrophizing the results if its suggestions are not adopted. Greg Valliere, the Potomac Research Group's chief political strategist, warns of a "shutdown drama" later this week (Morgan Korn, The Daily Ticker). This early in the week, there's little use in covering the back-and-forth quibbling until something more constructive is accomplished.

We will be hearing back-and-forth discussions over the taper question, too, and one of today's speeches--making up part of that cacophony Fisher mentioned--may have influenced today's decline. This morning, Atlantic Fed President Dennis Lockhart noted fewer businesses expanding their workforces, workers reluctant or unable to leave jobs for better opportunities, and startups experiencing difficulty in obtaining capital. Speaking separately, New York Fed President Dudley said that he doesn't see evidence of an increase in the economy's forward momentum. However, he thinks the headwinds working against growth will ease early in 2014, and, he still expects that conditions might be ripe for ending quantitative easing by the middle of 2014.

Then it was Dallas Fed President Fisher's turn, and he thought just about everything had been mishandled. He included the decision made last week. He reports that at that FOMC meeting, he told Chairman Bernanke, "Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question." He also thought the White House had mishandled the appointment on the next Fed chairperson. He doesn't believe that Janet Yellen's take on policy will be the right one, but still said she would be a great chairperson.

Today's allotment of U.S. economic releases began with the August Chicago Fed National Index an hour before the market open. The Chicago Fed reported that the index rose into positive territory, to 0.14, with positive readings indicating growth above trend. The Chicago Fed titled its summary "Index shows economic growth picked up in August." The prior number had been -0.15 and the prior revised number was -0.43, so that was quite a big jump. We're left to wonder what revisions will occur to August's number, too, but for now, the Chicago Fed reported growth in all four broad categories of indicators. Three of those four--production; sales, orders, and inventories; and employment--made positive contributions to the index. Consumption and housing rose to a slightly less negative -0.17 from a more negative -0.18.

The good news didn't extend to the three-month average, the CFNAI-MA3. While the CFNAI-MA3 rose to -0.18 from the prior -0.24, it remains below zero and, therefore, below historical trends. However, the CFNAI-MA3 has been churning back and forth across the flat-line level since late 2009, with -0.7 and +0.7 marking the breakout levels, according to the Chicago Fed. August's number remained within the churn zone. Inflation remains "tame," the Chicago Fed said.

After several weeks of lower numbers and last week's steadying, Moody's weekly Business Confidence jumped from the prior 20.4 to 23.00. Moody's labeled the tone of the survey responses as "brighter," and noted that almost all the categories saw improvement. Two-thirds of respondents believe that the economy's prospects will improve early next year, for example. While hiring and office space remain the soft spots, Moody's deems the sentiment as "consistent with an economy expanding near its potential." Note that that the statement no longer reads "at the high end of its potential," as it did in the summer.

After Friday's late-day announcement that its quarterly losses would be much bigger than had previously been announced, Blackberry Limited (BBRY, 8.82, up 0.09 or 1.09 percent) declined sharply this morning, with volume already matching the average daily volume by little more than an hour after the market open. That wasn't going to be the end of the story, however.

As a reminder, Jim Brown reported this weekend that the company's cash on hand fell, and they were cutting 40 percent of their workforce and hiring PriceWaterhouseCoopers as they explored selling the company. As might have been anticipated, BBRY garnered downgrades this morning, with two of those from Jefferies & Co. and RBC Capital. RBC cut its price target to $5.00. News surfaced that BBRY had taken delivery of private jet in July, not long before announcing job cuts, and that didn't help sentiment.

However, the news wasn't finished. By midday, BBRY was halted for trading, pending news. That news was that the company had agreed to an offer by Canadian insurance company Fairfax Financial. Fairfax is already BBRY's largest shareholder. The deal is for $9 a share. BBRY had been hovering just above $8.20 before the announcement, but it jumped after trading reopened and closed higher. When all was said and done, it traded more than four times the average daily volume. By shortly after the close, however, some pundits deemed the offer "iffy."

After reporting record sales of 9 million of its latest iPhones in three days, Apple (AAPL, 490.64, up 23.23 or 4.97 percent) surged higher. Analysts had expected 5-6 million. The company sold out initial supplies of its more expensive model, the 5S, but it did not give model-by-model numbers. In addition, more than 200 million users now run iOS7, marking this the fastest software upgrade in history, according to Wall Street Journal. The company also said that fourth-quarter gross margin and revenue will be near the high end of its previous guidance. That guidance was for a gross margin of 36-37 percent and revenue of $34-$37 billion.

This weekend, Netflix (NFLX, 302.04, down 11.79 or 3.76 percent) became the first online platform with an original production to win an Emmy. David Fincher, director of NFLX's political thriller "House of Cards," won the best director category. The stock opened above the flatline, but sellers must have been waiting.

In addition, cable company AMC Network's (AMCX, 66.03, down 1.48 or 2.19 percent) "Breaking Bad" won the Emmy for best dramatic series. Anna Gunn, starring in the series, won as best actress. This stock trades less than 500,000 in average daily volume, so anyone trying to take a position in this stock would do well to remember that the volume is thinner than in some other vehicles.

Facebook (FB, 47.19, down 0.30 or 0.63 percent) made the list of story stocks. Bloomberg offered a video showing why some occasional users may be wary of continuing with Facebook. Privacy issues prompt some to quit. That's not a concern only with FB. LinkedIn Corp. (LNKD, 239.56, down 4.34 or 1.78 percent) faces a lawsuit by customers who believe that the company may have gained access to email contact lists by hacking into external email accounts.

While wariness increases, Twitter moves forward with plans to take itself public. It has reportedly met with several investment banks about setting up a credit facility prior to going public.

The Financial Times speculated that Citigroup's (C, 49.57, down 1.64 or 3.20 percent) trading revenue may have declined in the third quarter. The newspaper said that C's earnings could drop by as much as 10 percent. C fell today on heavy volume. If those revenues decline, C won't be the only bank to experience such declines. Several across the globe have said that they might have weaker revenue. In late news, C said it would cut 1,000 people in its mortgage division.

Other story stocks included Alexion Pharmaceuticals, Inc. (ALXN, 112.50, down 1.15 or 1.01 percent). The company reported data from the second phase of its study of Asfotase Alfa in infants and young children with hypophosphatasia (HPP), an inherited, extremely rare metabolic disorder. This metabolic disorder, like many, causes progressive damage and can cause death.

Infants and young children treated with ALXN's drug showed noteworthy improvement in mineralization of their skeletons, in some as early as 12 weeks after treatment began, with improvement continuing in some for 48 weeks. Survival for that 48 weeks was 93 percent, and about 80 percent showed improvement in respiratory status.

Isis Pharmaceuticals, Inc. (ISIS, 38.48, up 2.42 or 6.71 percent) saw its price target raised to $43 from a prior $31 and also reported on results of a Phase 2 study, this one to treat familial chylomicronemia syndrome (FCS). ISIS called this a rare orphan disease that impacts only 3,000-5,000 patients. Three patients saw substantial reductions in the high triglycerides that characterizes this disease, as well as other improvements.

After the close, Red Hat, Inc. (RHT, 52.93, down 0.29 or 0.54 percent) dropped heavily after reporting earnings. Those earnings included a profit of $0.21/share on revenue of $374 million. If one-time charges were excluded, the earnings would have been $0.35/share, above the expected $0.34/share. Revenue was slightly above expectations, too. As this report was prepared, however, shares were last at $49.46, down 3.47 or 6.56 percent from the close.

In late-breaking news, Chrysler Group LLC said that it has filed with the SEC for an IPO. The UAW Retiree Medical Benefits Trust will provide the shares and receive the proceeds, the company said.

Let's look at daily charts. Last week, it appeared that it was soon going to be time for indices to retreat and retest their red 9-ema's. Instead, the surprise (to some) FOMC statement broke them higher. By today, most of them were finally retreating to test those moving averages, however.


Those new to my Monday Wraps might find the following three 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:

After testing a rising trendline extending from the May and August highs, the SPX fell back last week. Today, it hit and tested the support of its daily (red) 9-ema. Today's close was the first step in a successful test of the support, but it's far from the final step in a resumption of the rally.

To resume its rally, several things have to happen. First, the SPX must maintain daily closes above that red 9-ema, then above the top of marked zone that now extends up toward 1715. Even if it can break above that zone on daily closes, potential next resistance on daily closes will be close by, at the rising trendline, now crossing near 1725-1732. By Keltner standards, if the SPX can maintain daily closes above 1715, it sets a new upside target from about 1740-1750, but getting through those intervening Keltner, historical and trendline resistance points might be like trying to push through a hedge of cacti. There's danger that any of those could catch the SPX and send it back again into a support test.

What if the SPX can't maintain daily closes above the red 9-ema? In that case, it sets a new potential downside target from about 1669-1683. A failure to sustain daily closes at or above about 1669 sets the next potential downside target, marked on the chart.

Annotated Daily Chart of the Dow:

After also testing a rising trendline extending from the May and August highs, the Dow also fell back last week. Today, it pierced and tested the support of its daily (red) 9-ema. The Dow looked weaker by comparison to the SPX, with newly added GS (165.25, down 4.50 or 2.65 percent) joining JPM (51.46, down 1.34 or 2.54 percent) and KO (38.63, down 0.77 or 1.95 percent) in dragging the Dow lower. All three newly added stocks, also including V (196.24, down 2.59 or 1.30 percent) and NKE (68.98, down 0.39 or 0.56 percent), were down in the morning's trading, as Jim Brown had suggested could happen this morning.

The Dow didn't quite manage a close above the red 9-ema, but it did manage one sort of "at" that moving average. The next move is not a given. If the Dow can mostly maintain daily closes at or above the red 9-ema, it has a new potential upside target near 15579-15790, where potentially strong resistance on daily closes might be found. If the Dow can surmount that obstacle with daily closes sustained above about 15790, then it sets a new potential upside target near 15937-16035. However, traders should be aware that the historical, Keltner and trendline resistance waiting at that next potential upside target beginning at about 15579 could prove strong and could roll the Dow down again toward the red 9-ema.

Let's look at the more bearish case if the Dow falls below the red 9-ema. Sustained daily closes beneath the red 9-ema target the bottom of the current support zone, with strongest potential support in that zone currently near 15200-15250. A failure to find support above 15200 sets the next potential downside target, marked on the chart.

Annotated Daily Chart of the NDX:

Once again, the NDX outperformed on a Keltner and trendline basis, both last week and today. This occurred today despite many more declining than rising stocks comprising the NDX.

After breaking above a rising trendline extending from the May and August highs last week, the NDX retreated and closely approached its daily (red) 9-ema today. Trendline and two potential Keltner support levels converged, providing support. As long as the NDX sustains daily closes above that red 9-ema, now near 3201, it maintains a potential upside target near 3236-3268. A rollover beneath the red 9-ema on daily closes, however, sets a potential downside target near the bottom of the current potential support zone, near 3160 and perhaps, if the drop is sharp, even at the next lower zone, from about 3095-3127.

If the NDX falls through about 3095 on daily closes, the next potential downside target is set. The Keltner target is a little below the potential historical support at 3050, however, and I would be aware that historical support might be found in that 3050-ish zone, before the Keltner target is hit.

Annotated Daily Chart of the RUT:

After testing a shorter-term rising trendline extending from the July and August highs last week, the RUT fell back. Today it closely tested the support of its daily (red) 9-ema and bounced from that test. If the RUT can maintain daily closes above the red 9-ma and above about 1072, it sets a new potential Keltner target near 1083-1095, where Keltner potential resistance is joined by trendline potential resistance. That resistance could roll the RUT lower again or propel it to new heights if surprised shorts help fuel a launch above that potential resistance.

Let's look at the more bearish case. If the RUT sustains daily closes beneath the red 9-ema and particularly beneath about 1060, it sets a new potential downside target at about 1039-1049. A failure to sustain daily closes at or above about 1039 sets the next potential downside target, marked on the chart.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports ($DJT) often serve as a bellwether index for the economy. This index's actions often lead the others, particularly the Dow and SPX. However, it's not leading these days, but rather just corroborating what we see on other indices. Still, it's useful to watch for divergences from the behavior of other indices. Don't use such divergences as market-timing triggers, but do you use them to formulate what-if kind of hedges against losses if other markets take off in the direction of the diverging Dow Jones Transports.

Tomorrow's Economic and Earnings Releases

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

In addition to these listed events, tomorrow includes the important German Ifo Business Climate, at 4:00 ET tomorrow morning. A number of the U.K.'s Bank of England members speak through the day tomorrow, with the U.K. also gleaning every such statement to learn how long quantitative easing programs will continue there.

What about Tomorrow?

Annotated 60-Minute Chart of the SPX:

Today, the SPX continued its recent pattern of 60-minute closes beneath a falling red 9-ema. Prices tumbled all the way to the bottom of a potential support zone on 60-minute closes. One 60-minute close was even slightly below that support zone that extends roughly from about 1698-1707. Consistent 60-minute closes beneath that zone would set up a new potential downside target, near 1687-1694, but that hasn't happened yet. A subsequent lower target is also marked, in case that support should fail on 60-minute closes.

By midday, the SPX had steadied and begun rising. Resistance at the 9-ema stalled that rise again, however, so nothing has yet changed in the recent tenor. If the SPX can sustain 60-minute closes back above the 9-ema, it will run into potential resistance at the top of its small grey channel. That grey channel line could likely be pushed higher, toward the next potential resistance zone from about 1714-1722 on any strong rise, however. Sustained 60-minute closes above about 1722 are required before the next potential upside target near last week's high is set.

For now, the SPX has established that pattern of most 60-minute closes beneath the turning-lower red 9-ema. As long as that pattern continues, nothing has changed in the recent pattern and that test of potentially strong support near 1687-1694 is rendered more likely.

Annotated 60-Minute Chart of the Dow:

The Dow has already dropped toward the zone analogous to the SPX's 1687-1694 zone on this Keltner chart, underperforming the SPX. That Keltner configuration, now extending from about 15320-15375, often serves as strong support on 60-minute closes, but a failure to find such support would set the next potential downside target near 15020-15040.

As long as 60-minute closes are beneath a turning-lower red 9-ema, nothing has changed in the recent tenor for the Dow. A bounce attempt will also find thorny resistance grabbing at it all the way up to about 15510. Market participants should prepare for the possibility that such resistance, if tested, could roll the Dow back lower again.

However, if the Dow can sustain 60-minute closes above about 15510, a potential new upside target is set near 15567-15617. An additional potential upside target is set if 60-minute closes are maintained above 15617.

Annotated 60-Minute Chart of the NDX:

Once again, the NDX outperforms on a Keltner basis, but the end result is similar. Although it, too, has begun forming most 60-minute closes below a turning-lower red 9-ema, its next target near 3203-3210 is at a different Keltner level. The NDX also needs to sustain 60-minute closes above that red 9-ema before it sets a next upside potential target, with that target currently near 3233-3239. So far, the NDX has not been able to sustain such 60-minute closes above the current resistance zone, but it managed to hold support at or above the next support zone. Although evidence is mixed, like the other indices, nothing has changed in the NDX's recent tenor.

A higher target near last week's high is also marked, in case the next move is a strong one to the upside.

It's possible that today's lows will be retested if the NDX can't manage to sustain 60-minute closes above that resistance zone it's currently testing. If support that extends down to 3203 (maybe including round-number psychological support near 3200 for good measure) is broken on sustained 60-minute closes, the next potential downside target is currently projected at about 3173-3183. A lower potential downside target is also marked, in case that support should fail, too.

Annotated 60-Minute Chart of the Russell 2000:

The RUT also outperformed according to the Keltner charts. This afternoon, it began forming 60-minute closes back at or slightly above the red 9-ema, the only one of these indices covered in this post to do so. The RUT produced those closes back above the red 9-ema long enough to flatten that 9-ema and even turn it up again slightly. The RUT then rose high enough to test the bottom of the next potential upside target, from about 1073-1077. This is also the top of the short-term descending trendline (not drawn) off last week's highs. If the RUT can scramble back above that resistance on consistent 60-minute closes, it sets a new upside target near last week's high.

However, as of the close, we don't know whether the RUT will jump over that next resistance, as it so often does, or turn down beneath it again, pressured by some event overnight or tomorrow morning. Is it leading the way higher, as the RUT sometimes does, or did it just overrun its boundaries, as it often used to do on relief rallies? If the RUT turns down again, the obvious next downside target is a range extending from today's low up to about 1068.

A failure to maintain 60-minute closes above today's 1063.90 low would set up the next potential downside target, at about 1053-1059. A decline that deep would change the RUT's recent tenor, but that particular support configuration sometimes proves strong. Prices that barrel through it convert it to potentially strong resistance, however, and set up the next potential downside target, marked on the chart.

What do I think? How do we go about predicting what happens next when we can't predict the exact mix of statements from politicians and FOMC members, much less from tomorrow's slate of U.S. economic releases, Bank of England speakers and European economic releases? I predict that we're going to see news-driven action until we see some resolution to the debt-ceiling debates, the taper discussions, and perhaps the completion of the nomination process for the next FOMC Chairman, at the minimum.

Until then, we've got our chart configurations to help us draw scenarios to tell us when our trades are working as expected and when they're not. Those chart configurations won't always be right, as a confirmed movement one direction can be undone in an instant in this news-driven environment. They're the best thing we have going for us right now, though.