Market Internals


In an interview with The Daily Ticker, Dan Franklin, an editor with The Economist, responded to a question about his publication's "biggest, boldest" prediction for 2014. He didn't make a firm prediction but instead suggested that the "American economy might contribute more to the global growth than the Chinese economy for only the second time in the last eight years." Also today, Josef Joffe spoke to The Daily Ticker about his book The Myth of America's Decline. Joffe, editor of Germany's Die Zeit and a professor at Stanford, claims that those economists he calls "declinists" are wrong when they expect that the U.S. will decline in importance and be replaced by China as a driver of global growth. He lists China's export-driven model, state interference and historical precedent as reasons for his statements.

While these commentators were standing up for the prospects of the U.S. economy, others were again warning that the markets could quickly jolt lower. A number of Fed speakers appeared on the slate, and markets for a while reacted with consternation to what they had to say. However, with a few exceptions--the RUT being a notable one--most indices ignored any possible bad news today and focused on the good. The SPX gained 0.18 percent; the Dow, 0.03 percent; and the NDX, 0.34 percent. The RUT eased 0.17 percent. The SOX gained 0.23, and the Dow Jones Transports, 0.35 percent.

Gold futures (/GC) for February delivery settled at 1234.20, up 5.2 points. Silver futures (/SI) for March delivery settled at 19.701, up 0.178. Copper futures (/HG) for March delivery settled at 3.2580, up 0.0095. Light sweet crude futures (/CL) for January delivery settled at 97.34, down 0.31.

Treasury yields for the 30-Years settled at 3.890, down 0.0280 or 0.71 percent. Yields for the 10-Year settled at 2.8570, down 0.026 or 0.90 percent.

Monday's Developments

Last night, China's CPI of 3.00 percent met expectations of a 3.0-3.1 percent rise in prices, while PPI dropped only 1.4 percent rather than the expected 1.5 percent. Just the day before, data had shown that export growth had accelerated while imports grew less than expected. Also in Asia, Japan's GDP missed expectations, but its current account balance surprised. The deficit was much smaller than expected, and Japanese politicians claimed that Abenomics was working and would stay. Elsewhere in Asia, Thailand's prime minister dissolved parliament as anti-government protests continued another week.

Asian bourses turned in mixed performances. The Nikkei 225 rose 2.29 percent, and the Hang Seng, 0.29 percent. The Straits Times lost 0.02 percent, however, and China's Shanghai Composite gained 0.05 percent after falling sharply from its opening high.

Attendees at the Eurogroup meetings today likely mulled over the Eurozone's disappointing Sentix Investor Confidence as well as Germany's disappointing industrial production and trade balance. Moody's Investors Service today published a report that concluded that European banks' financial status would remain under pressure for most of 2014 even though some economies had begun to recover. Germany's Finance Minister Wolfgang Schaeuble and others said this morning that establishing agreement for a Single Resolution Mechanism (SRM) to help Europe's banks when help is needed would likely take several more meetings. By this afternoon in Europe, however, Germany was reportedly noting that some progress had been made.

In other European news, Reuters reported today that the Bank of France has raised its Q4 GDP estimate for France to 0.05 percent growth after its monthly business sentiment survey moved above the benchmark 100 for the first time since May, 2011. European bourses gained. The FTSE 100 rose 0.18 percent; the DAX, 0.25 percent; and the CAC 40, 0.11 percent. Spain's IBEX 35 rose 0.92 percent, and Italy's FTSE MIB, 0.89 percent.

In the U.S., Moody's weekly Business Sentiment rose to 32.9 from last week's 30.3. Moody's concluded that business sentiment is the strongest it's been since the recovery began in 2009.

This afternoon, Fed speakers lined up one after the other. Today is the last day when Fed speakers will comment ahead of the upcoming December FOMC meeting.

First, Richmond Federal Reserve Bank President Jeffrey Lacker spoke in Charlotte, North Carolina. He spoke at an economic outlook conference. Lacker is not currently a voting member and is an alternate member for 2014. He asserts that he was never in agreement with the current asset purchase program. Lacker essentially confirmed that central bankers would discuss tapering at the December meeting but didn't offer an opinion about the outcome of that discussion. The next Fed speaker would have more to say.

James Bullard, president of Federal Reserve Bank of St. Louis, spoke about monetary policy and the economic outlook, accepting audience questions. Bullard will not be a voting member in 2014.

Bullard might have taken some market watchers aback when he asserted that a small taper in December might be a good way to recognize the improvement in the labor market. Such a taper wouldn't have to be followed by further tapering if conditions deteriorated or didn't continue to improve, he said. He specifically addressed the recent low inflation readings and said there's not a consensus on why low inflation has persisted. He further noted that a small December taper would not interfere with monitoring the inflation readings into the middle of next year.

Next, Dallas Federal Reserve Bank President Richard Fisher spoke in Chicago, with banking trends as his topic. An alternate voting member this year, Fisher will be a voting member as of the first FOMC meeting in 2014, so his comments likely were taken as seriously as Bullard's. One of the sections of his published speech was titled "It Is Time to Taper," so he stayed true to his taper-sooner stance. He also used the term "at the earliest opportunity" when discussing the timing of tapering.

He, like Lacker, has never been a particular fan of the current asset purchase program. He believes that the program will serve as "kindling for potential long-term inflation, which will sorely test our capacity to manage policy going forward" (Dallas Fed website). He commented on inflation targets, saying that he saw no justification for raising medium-term inflation expectations above 2 percent, as some economists have suggested. Fisher speaks again this evening in Chicago, responding to questions, after this article was submitted for publication but possibly before it appeared in your inboxes. Watch for a possible reaction via the futures, although his speech was strident and clear today, so it seems unlikely any new scares will develop.

Were we being warned of tapering beginning in December or perhaps an announcement that Fisher wants to see: a clear-cut timetable for tapering to zero? While the clear-cut timetable may be too much to expect with so many market uncertainties ahead of us, market watchers will certainly now be alert to the possibility of a tapering announcement coming out of the next meeting. Market opinions about the likelihood of such an announcement have swung back and forth since Janet Yellen's nomination, and equity and bond behaviors have swung back and forth, too. Some market watchers believe it would be unlikely that a tapering would begin in December with much political uncertainty just ahead with budget and other discussions.

Also this afternoon, Fed Chairman Ben Bernanke was at attendance at a meeting of the Financial Stability Oversight Committee. As happened last week, the major press did not appear to cover the discussion and no prepared testimony was available on the FOMC website.

Story stocks included Boston Scientific (BSX, 11.72, down 0.13 or 1.10 percent). The FDA delivered disappointing news to BSX, saying that the company's study of Watchman, its anti-stroke device, did not meet its non-inferiority goal. Wells Fargo reportedly believes the device will still be approved in the second quarter of 2014. However, BSX also reported today that retrospective data on its Precision Spectra Spinal Cord Stimulator System suggests that three months after the device was implanted, it was providing pain relief and improvements in function that the company deemed highly significant.

Sysco Corporation (SYY, 37.62, up 3.31 or 9.65 percent) gapped higher this morning after agreeing to merge with US Foods. SYY will pay about $3.5 billion for US Foods' equity, divided into $500 million in cash and $3 billion in Sysco stock. SYY has secured bridged financing to restructure US Foods' debt. The total enterprise value of the merged companies will be about $8.2 billion.

Abercrombie & Fitch (ANF, 34.10, down 0.77 or 2.21 percent) announced that it was restructuring its contract with Michael Jeffries, Chairman and CEO. The restructuring will more closely link his compensation with the company performance, the announcement said.

McDonald's Corp. (MCD, 95.72, down 1.08 or 1.12 percent) reported that November U.S. sales dropped 0.8 percent. Worldwide, comparable sales climbed 0.5 percent.

Blackberry (BBRY, 5.75, down 0.13 or 2.21 percent) dropped. The company reports on December 20, and some market watchers fear that it may warn sometime this week.

Boeing (BA, 134.68, down 0.50 or 0.37 percent) commented positively on the Trade Facilitation Agreement announced this past weekend. BA's competitor, EADS, was also in the news today. The company secured an order for its Airbus aircraft. The order was for ten of its A350-900 and fifteen of its A320neo family aircrafts from Kuwait. The company also announced that the downturn in defense-related business would prompt the company to trim 5,800 jobs at its defense and space unit. Those jobs will be trimmed by transferring employees to other units, not renewing temporary contracts, and other measures. The company also plans to negotiation labor cost reductions.

Medtronic (MDT, 57.87, down 0.27 or 0.46 percent) announced today the first in-human implant of the company's minimally invasive cardiac pacemaker. A patient in Linz, Austria was implanted with the device.

General Motors (GM, 40.90, up 0.73 or 1.82 percent) posted another $0.50 in gains after hours. The Treasury announced that it had completed its exit from GM.

Early leaders today included insurers such as HUM (104.42, up 0.42 or 0.40 percent), UNH (73.72, up 0.22 or 0.30 percent), and WLP (90.98, up 0.29 or 0.32 percent). All spent the afternoon retreating from early gains, however.

Twitter (TWTR, 49.14, up 4.19 or 9.32 percent) gained today. IBD and others business news sources noted that the company had launched new advertising products that could increase earnings and revenue, but even IBD was unclear what was behind the gains.

After the close, Texas Instruments (TXN, 43.58, up 0.09 or 0.21 percent) added to the day's gains. It was last at 43.72, up 0.14 from the day's close as this report was prepared. The company updated its earnings outlook for the fourth quarter. The company now expects revenue of $2.92-3.04 billion, a narrower range than the previous $2.86-3.10 billion but a range with the same $2.98 billion average. The company said earnings would be $0.44-0.48/share, also a narrower range than the previous guidance of $0.42-0.52/share but also retaining the previous average.

PVH Corp. (PVH, 127.43, down 2.68 or 2.06 percent) moved above and below the day's close after reporting earnings after the close. The apparel company known for its IZOD, Calvin Klein, Tommy Hilfiger and other brands beat expectations but said that the "current holiday season will be very competitive and highly promotional."

Let's look at daily charts for an overview. We saw another day when many indices produces daily candles indicative of indecision.


Those new to my Monday Wraps might find the following 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 rectangles, usually green for upside and red for downside. Orange rectangles 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 rectangle, 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:

By last Monday, the SPX and some other indices had been overdue for a support test of the lower boundary of the smallest (grey) Keltner channel. Last week, the SPX executed that test and promptly bounced back above the (red) 9-ema again. This type of action is still in keeping with a strong rally pattern, so nothing that has happened so far has changed the tenor of trading. This week, the SPX has another task to complete the bullishness, however: a drive to a new high and a breakout above next resistance on consistent daily closes. That hasn't happened yet.

A first step is of course printing higher intraday days and closing highs. However, potential resistance on daily closes likely now stretches up to about 1,822, the top area where the widest Keltner channel's upper boundary is likely to be pushed on further price gains. Be conservative in your "going to the moon" estimates until the SPX can maintain consistent daily closes above about 1,822. Even if the SPX sets new intraday or closing highs, it needs to clear this resistance on daily closes to be considered in breakout territory. Until then, it's still testing resistance, at least in my opinion.

What if the SPX rolls over beneath the red 9-ema? Consistent daily closes beneath the red 9-ema, likely down to about 1,797 before it could be tested, would suggest another retest of the bottom of the smallest (grey) channel as well as the top of the SPX's former rising regression channel. That combined potential support on daily closes could kick in anywhere from about 1,776-1,788. Consistent daily closes beneath about 1,776 would move the SPX back inside that rising regression channel and perhaps suggest that price could drop into the 1,747-1,764 range. Other potential targets are also marked in case support doesn't hold, but the chart setup suggests that even if 1,747-1,764 is tested, price may bounce back up toward 1,772 afterwards, if not higher. If price were to drive hard down through 1,747, however, that potential bounce setup would be undone.

Annotated Daily Chart of the Dow:

By last Monday, the Dow also had been overdue for a retest of the lower boundary of its smallest (grey) Keltner channel. Like the SPX, the Dow also retested that support last week. The Dow's bounce was also a healthy one, bringing the Dow back above the (red) 9-ema on Friday's close. However, by this morning, the Dow was facing likely strong resistance on daily closes that stretches from about 16,056-16,166. It's not until the Dow is consistently producing closes above about 16,166 level that we can say that it's likely pulled free of resistance and reset a new upside target. That new potential upside target would be at about 16,216-16,347.

If the Dow instead rolls down again and sustains daily closes beneath the red 9-ema, its decline target could take prices anywhere between about 15,800-15,967. That could retest last week's low daily close. A failure to hold support at or above about 15,800 on daily closes sets up a new potential target near 15,620-15,740. Other lower subsequent targets are also marked, if needed.

Annotated Daily Chart of the NDX:

The NDX remains in breakout mode, on a momentum run. Last week, its retreat was smaller, on a Keltner basis, than the retreats seen on other indices. The NDX retreated only to the converged thick potential support on daily closes that now stretches from about 3,448-3,480. That potential support has converged so thickly that it bounced the NDX higher last week and could do so again on any retests. Breaking support sometime this week would likely require either a hard drop that pierces the support or a prolonged battering at that support over several days.

The NDX might technically be on a momentum run, but it's been running higher with small-bodied candles. That behavior should be watched, as it may be indicating waning bullish fervor. As the NDX climbs, it's also separating potential support zones, so be careful if the NDX does cut sharply through potential 3,448-3,480 support. It could tumble hard to next support below that, likely to be driven to 3,400-3,437 on any sharp declines. Failure to hold support there could see a test of 3,347-3,377 support. Other potential targets are also marked.

Annotated Daily Chart of the RUT:

Last week, the RUT also retested the lower boundary of its smallest (grey) Keltner channel and then bounced promptly back above the red 9-ema. However, Friday, the RUT's price behavior left an upper candle wick or shadow, and today's retreat brought the RUT back to retest its red 9-ema's support. So far, that support has held, but the RUT is underperforming other indices.

If the RUT can sustain daily closes above the red 9-ema or perhaps above 1,124, it maintains a potential upside target from about 1,137-1,150. A higher potential upside target is also marked in case the RUT can maintain daily closes above 1,150.

However, if the RUT slips below about 1,112 on daily closes, it could also soon drop into a retest of 1,095-1,108 potential support. That's trendline (not shown) as well as round-number and Keltner potential support and is probably important psychologically. Other potential downside targets are marked in case that important support fails on sustained daily closes.

Annotated Daily Chart of the VIX:

Although we often watch the Dow Jones Transports as a bellwether index, it's not foretelling anything different than the Dow and SPX right now. The VIX is another bellwether index that should probably be watched, so its chart is included instead. Although the VIX often trends down during low-volume holiday periods, it had, by last week, broken out above a short-term descending trendline. It has since come back down to retest that broken resistance and may or may not be ready to bounce again. Don't use this as a market-timing tool or rely on it as a be-all, end-all indicator. However, you can remain cautious about equity gains when the VIX is bouncing above that short-term trendline and stand out of the way of equity rallies if the VIX falls sharply back below that trendline.

Tomorrow's Economic and Earnings Releases

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

Another important development occurs tomorrow that's not listed on most economic calendars: a vote by U.S. regulators on the final version of the Volcker Rule. Banks are worried that a new iteration could go beyond a ban on proprietary banking, an activity most have already ceased, and could ban them from other activities they claim keep markets liquid. After the close, information was appearing that the version voted on tomorrow could indeed impose new conditions. Rumors are that the banks must demonstrate historical customer demand and previous trading experience with any financial assets that they transact on behalf of their clients.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Today's action could be interpreted as the beginning of a pulling back from Keltner resistance tested early today or as a bull-flag pullback before another charge higher. By the close, 30-minute candles were closing mostly at or below a rounding-lower 9-ema.

As long as the SPX maintains most 30-minute closes between about 1,806-1,813, it's chopping around in a noisy consolidation zone without much indication of next direction. Sustained 30-minute closes above that zone--or a gap higher that isn't quickly reversed--set up the potential for a rise to the next short-term potential target at about 1,818-1,822. If the rise should occur, bulls would want to see any slight pullbacks supported by a rising red 9-ema.

Sustained 30-minute closes below that 1,806-1,813 zone--or a gap lower that isn't quickly reversed--set up the next short-term potential downside target from about 1,799-1,802. If the drop should occur, bears would want to see any small bounces turned back by a rolling-lower red 9-ema. This would be an important potential support zone on the daily chart, too, so bulls would want to see it hold. Further potential downside targets are also marked in case the SPX should barrel lower, which it of course could do if round-number 1,800 support is breached.

Annotated 30-Minute Chart of the Dow:

Thirty-minute closes contained within the 16,000-16,075 are unfortunately just movement within a noisy consolidation zone. They don't tell a lot about next direction. If the Dow were to produce sustained 30-minute closes above about 16,075 or to gap above that level and not quickly reverse, it sets a next potential upside target of about 16,157-16,190. This would constitute a retest of the previous intraday high, so it's an important zone on the daily chart, too. If the Dow should head higher tomorrow morning, bulls would want to see strength confirmed when small pullbacks find support at a climbing red 9-ema on the 30-minute chart.

If the Dow instead maintains 30-minute closes below about 16,000, its sets up a potential short-term downside target at about 15,958-15,990. If that 15,958 support should be breached on 30-minute closes, as could be possible if round-number 16,000 support is again lost for any length of time, the next potential downside target is 15,870-15,900. Another additional downside target is also marked. Bears would want to see short-term bearishness confirmed by short-term bounces getting stopped on 30-minute closes at a rolling-lower red 9-ema.

Annotated 30-Minute Chart of the NDX:

Thirty-minute closes mostly inside a range from about 3,510-3,527 will show noisy movement within a congestion zone without much prediction of next direction. Thirty-minute closes above that zone or a gap above it that isn't reversed within the first hour would move the NDX into breakout territory on this short-term chart, too. Bulls would want to see the rally tenor continued by seeing pullbacks stopped on 30-minute closes by the support of a rising 9-ema.

Sustained 30-minute closes beneath about 3,510 set up a potential downside target of about 3,493-3,503. Short-term bears would love to see bearishness confirmed when any short-term bounces are turned back at a rolling-lower red 9-ema. Sustained 30-minute closes beneath about 3,493 set up the next potential downside target, near 3,472-3,481. This would drop the NDX into what could be a strong support zone on the daily chart, but there's another lower target also marked on this 30-minute chart.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's last-minute bounce saved the RUT from setting a new short-term lower target, as it was threatening to do. Sustained 30-minute closes from about 1,126-1,130 are closes within a noisy congestion zone that aren't particularly predictive of next short-term direction. Sustained closes above about 1,130 or a gap above that level tomorrow morning that isn't quickly reversed set a potential upside target near 1,134-1,136. That's a level of potentially strong resistance--both Keltner and recent historical. Watch for the possibility of strong resistance there, but we'd be kidding ourselves if we didn't acknowledge the possibility that the RUT could gap past that level first thing tomorrow morning or drive past it. The next potential upside target in that case would be 1,140-1,143. That's also possible significant resistance on the daily chart. Short-term bulls would like to see any such rally supported on pullbacks by a rising-higher 9-ema on this 30-minute chart to show building strength.

We'd also be kidding ourselves not to acknowledge that the RUT could gap lower tomorrow morning. Sustained 30-minute closes beneath about 1,126 would set up a potential downside target near 1,120-1,123. Sustained 30-minute closes beneath about 1,120 would in turn set a new downside target that would retest last week's low. On any downturn, short-term bears would like to see short-term bounces stopped at a rolling-lower red 9-ema.

Today was another day of indecision, demonstrated by the doji-type candles produced on many indices. Many indices paused at the expected resistance on a bounce, and the RUT underperformed by many measures. By tomorrow or Wednesday, market participants may have finished ruminating over the Fed speak and other developments and have decided on next direction.

Linda Piazza

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