Market Internals


On their way to a positive day, U.S. markets appeared to pull European markets out of the doldrums this morning.

Trading wasn't underway long this morning before the SPX achieved a new all-time intraday high and the NDX hit a new multi-year intraday high. Performances across the globe had been more mixed. Asia had been weak, and some European bourses had spent most of their morning trading in negative territory. That was about to change. Shorts across the globe were soon going to scramble to buy to cover their trades, doing their part to push prices higher.

With gains pegged in the 0.60-0.65 range across most major U.S. indices, the buying looked to be broad based. Despite those new intraday highs, however, the SPX did not best its 2013 closing high. The NDX, however, did beat its 2/18/14 closing high. The RUT did not best either its previous intraday high nor its previous closing high, and the Dow is far away from besting either.

The SPX gained 0.62 percent; the Dow, 0.64 percent; and the NDX, 0.63 percent. The RUT rose 0.85 percent, and the SOX, 0.39 percent. The Dow Jones Transports, often an upside leader on days when gains are made, underperformed, gaining 0.44 percent.

Health insurers such as HUM (113.69, up 10.87 or 10.57 percent), UNH (76.01, up 2.20 or 2.98 percent) and AET (71.80, up 1.37 or 1.95 percent) had a good day ahead of this evening's earnings report by THC. Analysts, including JP Morgan's Justin Lake, say that the government's cut to reimbursements for insurers will be much less than it appeared they would be on Friday, when regulators first unveiled their proposals.

Gold futures (/GC) for April delivery settled at 1,338.0, up 14.4. Bloomberg's commodity analyst thought that geopolitical turmoil and weakening U.S. growth pointed traders toward gold as a safe-haven trade, but U.S. Commodity Futures Trading Commission data from the last several weeks reveals some vacillation on the part of big money traders. Silver futures (/SI) for April delivery settled at 22.070, up 0.272. Copper futures for March delivery settled at 3.270, down 0.0210. Light sweet crude (/CL) for April delivery settled at 102.82, up 0.62.

Monday's Developments

Most Asian bourses slipped lower last night. The Nikkei 225 dropped 0.19 percent; and the Hang Seng fell by 0.80 percent, but the Straits Times gained 0.19 percent. China's Shanghai Composite fell 1.75 percent. House prices in China rose 9.6 percent year-over-year, down from the prior 9.9 percent, and market participants reacted to news that commercial banks in China have tightened lending policies for property. Some banks in China lost ground in today's trading.

What about Europe? This weekend, the Group 20 finance ministers met in Sydney. G20 goals include raising the collective GDP, representing 85 percent of the global economy, by two percent more than current policies might raise them in the next five years. Germany's finance minister wasn't so certain such lofty goals could be achieved, and few specifics for achieving such goals were offered. However, the new G20 leader, Australia's Joe Hockey, got kudos for getting the group to agree to a goal. Our new FOMC chair received compliments, too, at her first G20 meeting while heading the FOMC.

The G20 statement repeated that monetary policies must remain accommodative. That statement also expressed regret that the U.S. Congress continues to block reforms they say were agreed upon in 2010 that would allow emerging powers more voting power in the International Monetary Fund (IMF). G20 members asked that the U.S. ratify the reforms before April's meeting. The group expressed optimism about progress toward ensuring that multinational companies pay their fair share of taxes.

This morning, Germany's much watched Ifo Business Climate beat expectations. European bourses also await the results of the ECB's audit of the Eurozone economy, with ten days left before the next policy decision. Over the weekend, the ECB's Mario Draghi reasserted his "take any action" stance to avoid deflation.

Some European bourses had a volatile morning before heading higher after our markets made early gains. The FTSE 100 gained 0.41 percent after spending most of the day in negative territory; the DAX, 0.54 percent; and the CAC 40, 0.87 percent. The CAC 40 had outperformed both other indices all day. Spain's IBEX 35 gained 1.21 percent, and Italy's FTSE MIB, 0.42 percent.

As many will be aware, conflict worsens in the Ukraine. The situation is still developing, so that any information presented here might be outdated by the time it is read. However, the latest information I noted said that President Viktor Yanukovych has driven to an unknown destination, but one purportedly in a pro-Russian area of the Ukraine. A warrant has been issued for his arrest, charging him and others with the mass killing of civilians. Parliament has passed new laws and made a deal with protesters.

The U.S. calendar included several releases although none of them are usually market moving. Markit released the February Flash Services PMI, and the 52.7 headline number disappointed. Experts had predicted that the headline number would rise to 56.9 from the prior 56.7. Markit pointed out that this was the weakest service performance seen in four months, blaming bad weather for a "renewed accumulation of unfinished work at service providers."

Markit noted, however, that the survey had uncovered increases in staffing levels and new business volumes. A scan of the seven categories surveyed--business activity, new business, outstanding business, employment, prices charged, input prices, and business expectations--showed all were above the benchmark 50.0.

Moody's weekly Business Confidence measured 37.0, with responding businesses remaining upbeat, the firm said. Moody's believes that the upbeat sentiment in the face of softening economic data last week means that businesses attribute that softening to temporary causes such as the winter storms.

The Federal Reserve Bank of Chicago released its Chicago Fed National Activity Index (CFNAI) today, titling the report "Economic Growth Slowed in January." January's headline number was -0.39, down from December's -0.03. Production-related indicators drove the decline in the headline number. Manufacturing output dropped 0.3 percent month over month, and manufacturing capacity utilization fell 76.0 percent month over month. As with the previously mentioned report, however, employment-related indicators contributed positively to the overall number.

The three-month average remains positive, the Chicago Fed noted, but it dropped to +0.10 from the prior +0.26. That three-month average suggests that the growth in national economic activity still remains above its historical trend. Inflationary pressure remains limited, the Chicago Fed concluded.

Perhaps this report, coupled with this weekend's G20 statement, again influenced hopes that tapering would slow. Several other statements countered that belief. Perhaps it was, after all, just the siren calls of those nearby prior highs that contributed to the cheery mood.

The Federal Reserve Bank of Dallas released its regional report, the Texas Manufacturing Outlook Survey. The Dallas Fed noted that February's production result produced the tenth month in a row with an increase, rising from 7.1 to 10.8. This strength contrasts with the results from Chicago's national survey.

Capacity utilization also rose in Texas, as did shipments. The outlook proved less optimistic than it had been, however. Both the general business activity and company outlook indices declined, to zero and 3.4, respectively. Labor market indicators measured continued employment growth and longer workweeks, the Dallas Fed said, with hours worked rising to the highest level seen in more than two and a half years. That produced upward pressure on wages, and prices rose, too.

Story stocks included Netflix (NFLX, 447.00, up 14.77 or 3.42 percent), making news on both business wires and mass-market news outlets. NFLX made a deal with Comcast (CMCSA, 51.15, up 0.10 or 0.20 percent). NFLX will pay Comcast for faster access speeds for Netflix customers, with NFLX servers connecting directly to Comcast data centers. This cuts out the third parties that NFLX had previously been paying. Comcast customers should be able to access NFLX directly without needing an extra apparatus, one report noted.

Consumers, already made nervous by the Comcast/TimeWarner deal, grew more nervous. Some commentators assured consumers that the forces of the market place would ensure that NFLX prices are not unduly hiked. NFLX will merely be paying Comcast what it was already paying server farms and other middlemen entities, they noted. Some consumers still nervously asked, what market forces, when internet accessibility is controlled by fewer and fewer companies?

Depending on which article you read, the recent court ruling that appeared to undermine net neutrality either made necessary such a deal by NFLX to keep internet providers from slowing their streaming content or else opened up the opportunity for them to make such a deal. NFLX denied that the net neutrality ruling had anything to do with the deal, and called the deal a "peering" deal, not one that would provide it with "preferential network treatment." Whether or not the net neutrality ruling did play a part, the two companies may still have some hurdles to jump in this deal. The FCC has vowed to institute new rules to prevent ISPs from making deals with content companies for better delivery (Financial Times).

Dish Network (DISH, 57.37, down 0.55 or 0.95 percent) claims that it doesn't want to engage in a bidding war over T-Mobile. SoftBank (SFTBY, 38.33, up 0.48 or 1.27 percent) is rumored to be considering an offer for T-Mobile (TMUS, 32.31, up 0.28 or 0.87 percent).

DISH might not want to engage in a bidding war, but Men's Wearhouse doesn't have any problem doing that. Today's wrinkle in the Men's Wearhouse/Jos. A Bank Clothiers Inc. (JOSB, 60.04, up 4.99 or 9.06 percent) saga is that Men's Wearhouse has raised its takeover offer by about ten percent.

TriQuint Semiconductor (TQNT, 11.64, up 2.41 or 26.11 percent) and RF Micro Devices (RFMD, 7.03, up 1.22 or 21.00 percent) announced an all-stock deal in a merger of equals. The deal may be described as a merger of equals, but RF Micro Devices will be the acquiring company, with RF Micro's CEO the CEO of the combined company. Before the echoes of the news had even died away, a shareholders rights law firm had announced an investigation of the merger.

Blackberry (BBRY, 9.83, up 0.69 or 7.55 percent) needed some good news. That good news came in the form of a rumor that Ford would be employing BBRY for its Sync mobile phone multimedia software. Ford will not be using Microsoft (MSFT, 37.69, down 0.29 or 0.76 percent) Windows, according to this rumor.

Verizon (VZ, 46.23, down 1.04 or 2.20 percent) fell into the close. Vodafone reportedly announced that Verizon shares would be distributed to its shareholders today. Volume was huge at more than 501,000,000 shares at last count with the three-month average daily volume at 17,014,400.

Activist Carl Icahn just can't stay out of the news. He issued an open letter to eBay (EBAY, 56.30, up 1.71 or 3.13 percent) shareholders, letting them know that he had taken a substantial stake in the company. Of course, Icahn had some ideas about what should be done to increase value in those shares. That included selling off the PayPal unit. He got in a few jibes at director Marc Andreessen, too.

GE (25.29, up 0.35 or 1.40 percent) announced a new "ecoimagination" budget today. The ecoimagination project itself is not new. It was established in 2005. The company will devote $10 billion through 2020 for research on complex energy projects. Projects considered or to be expanded are next-generation fracking, compressed natural gas in a box, and plans to build the blades for wind turbines more inexpensively.

Bitcoin was in the news again today and not in a good way. The chief executive of Mt. Gox, a bitcoin exchange that was among the first to signal problems with bitcoin withdrawals, has resigned from the board of the Bitcoin Foundation, effective immediately. Bitcoin has disputed Mt. Gox's assertion that the difficulty with withdrawals that led Mt. Gox to suspend withdrawals indefinitely stems from Bitcoin. Bitcoin said the problem is the exchange's.

Near the close, an Alabama state securities administrator and a past president of the North American State Securities Administrators Association, announced that he will issue a consumer alert regarding the currency tomorrow, according to a Marketwatch story. He reportedly will suggest that if problems redeeming bitcoins or cashing out accounts continue, investors or traders should stop trading. That includes making deposits. As this article was prepared, Mt. Gox's website lists the last value for Bitcoins at $161.73, with today's high at $332.00 and low at $131.72.

Canon (CAJ, 30.66, up 0.35 or 1.15 percent) has announced that it might stop selling cheap digital cameras and instead focus on its more expensive cameras. Cell phone cameras have cut into the market for the cheaper cameras.

Pfizer (PFE, 31.99, up 0.53 or 1.68 percent) will again ship its thyroid drug, Levoxyl, the Wall Street Journal reported. Many thyroid patients, doctors, and pharmacies scrambled for supplies last year after a recall. The company also announced "positive top-line results" in its trial of a drug to evaluate the efficacy of Prevenar 13 in adults 65 and older. The drug is used to immunize against community-acquired pneumonia.

Chesapeake Energy (CHK, 27.29, up 0.72 or 2.71 percent) may spin off or sell Chesapeake Oilfield Services, the company said today.

Companies reporting earnings this morning included GTAT (14.14, up 2.03 or 16.76 percent), beating on earnings but missing on revenue; HSBC (53.04, down 1.29 or 2.37 percent), missing on profit; and PANW (76.78, up 3.16 or 4.29 percent), beating on EPS and revenue.

After the bell, Tenet Healthcare (THC, 48.33, up 1.46 or 3.12 percent) reported earnings. In addition, TNH reported that it had signed a two-year agreement with AET. AET members will be able to receive care at THC hospitals and outpatient centers. The company posted a loss but also registered a beat on EPS and revenues. The losses were mostly due to the acquisition of Vanguard Health Systems, the company said. Excluding one-time and other items, the company reported earnings of $0.43 per share, with expectations previously pegged at $0.31 per share.

Let's look at daily charts. Be sure to check out the legend for the moving averages and Keltner channels I use. The legend is too big to include in each chart, so an example is posted just before the SPX daily chart.


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.

Legend for Moving Averages and Keltner Channels, Standard Used on All Charts:

Annotated Daily Chart of the SPX:

The SPX has been maintaining daily closes at or above its rising (red) 9-ema, reestablishing its rally pattern. As long as it's doing that, it's maintaining its strongest rally pattern.

Today brought the SPX up all the way to to potentially strong resistance from daily closes, from about 1,854-1,866, and that resistance held. Moreover, the SPX pulled back, leaving an upper candle shadow behind. The SPX would need to maintain daily closes above about 1,866 before we can consider it free of that resistance and setting the next potential upside target, at about 1,875-1,889.

If the SPX retreats after leaving behind that long upper candle shadow or wick, watch for potential support on daily closes on the red 9-ema, or perhaps as low as about 1,807 if the SPX retreats all the way through its smallest (grey) Keltner channel. If the SPX should sustain daily closes beneath about 1,807, the Keltner setup suggests that the rally pattern has unraveled and that the SPX could drop all the way to about 1,756-1,777. Of course, we know to watch for round-number support at about 1,800, despite that lower potential Keltner target.

Annotated Daily Chart of the Dow:

A scan of the Dow's chart shows that the Dow has also reinstituted its rally pattern of climbing higher with daily closes at or above a rising (red) 9-ema. However, a quick glance also shows that the Dow is underperforming the SPX on a Keltner basis, not yet having tested the same Keltner resistance level. The Dow also left behind a long upper candle shadow, and it did not quite clear the next resistance.

Sustained daily closes above about 16,225 would suggest that the Dow has set a new upside target, but it hasn't quite done that yet. Next potential Keltner resistance on daily closes--and the new upside target if the Dow can sustain daily closes above about 16,225--coincides with historical resistance, too, at about 16,400-16,548. Keltner channels suggest an upside target of 16,685-16,825 if the Dow can sustain daily closes above 16,548, but of course there's likely to be historical resistance at the previous 16,588.25 high. I wouldn't ignore that as possible resistance, as there are bound to be some sell orders kicking in just below that previous high.

If the Dow should roll over instead of rising higher, potential support on daily closes at 16,000 awaits. Keltner evidence suggests a downside target of about 15,769-15,880 if the Dow sustains consistent daily closes beneath 16,000. Other potential targets are also marked on the chart.

Annotated Daily Chart of the NDX:

Two weeks ago, when we last had a Monday Wrap, I wrote about the broadening formation on the NDX, and the difficulty that formation presented. When has the NDX broken to the upside and out of that broadening formation and when is it just broadening the broadening formation?

The NDX travels along the top of the widest Keltner channel, a vantage point it seems to enjoy (if you'll allow the anthropomorphism) for the last several months. Once again, we have no further upward Keltner channels to guide us if the NDX does break higher. In normal conditions, it would be time for a pullback, but the broadening formation tells us that this is an unstable formation.

The suggestion from the Keltner channels and that broadening formation is that sustained daily closes above about 3,710 suggest an new upside breakout and a momentum run, but I am always leery of the sustainability of breakouts out of broadening formations, particularly if they're of short duration or not by many points. Don't bet the farm on either long plays or counter-directional shorts on the breakout, if it occurs.

The NDX may have support on daily closes down to about 3,640, but when the NDX retraces, it dips all the way to the bottom of its grey Keltner channel more often than some of the other indices do. If the NDX does break lower than 3,640 on daily closes, next potential support on daily closes might be found from about 3,550-3,600 (Keltner, round-number and gap).

If that support doesn't hold, Keltner channels suggest a next target from 3,400-3,460, but I would certainly be aware of historical support from about 3,500-3,520, too. Keltner targets are hit too often to ignore, but neither would I ignore the same historical support levels that everyone else is going to be watching. Unless there's a rout that is cutting through all support, it's likely that there are some buy orders sitting just north of likely strong support near 3,500.

Annotated Daily Chart of the RUT:

Today's move brought the RUT up into next strong potential resistance (Keltner, historical) as the RUT hit its next Keltner target. At least for today, that resistance held and knocked the RUT back, leaving behind a bit of an upper candle shadow. It's not a long enough candle shadow to consider it particularly bearish yet, but it does verify the strength of the resistance tested today. Keltner evidence suggests that the RUT needs to sustain daily closes above about 1,186 before we can consider it as having broken free of that resistance, setting the next upside target. That subsequent target would be from about 1,195-1,210.

If the RUT drops from this resistance test, potential support on daily closes lies at 1,138-1,155, although there's also that congestion zone that lingered near 1,160 in January, perhaps building up a support zone. That 1,160 level certainly didn't act as support during the late January/early February rout, but the potential support should at least be acknowledged.

We should also acknowledge the potential support at 1,120 if the RUT can't sustain daily closes above about 1,138, but the Keltner evidence suggests that the next target would be lower, at about 1,094-1,108.

Annotated Daily Chart of the Dow Jones Transports:

The Dow Jones Transports (DJT) had formed a rough potential head-and-shoulders formation, but today this index finally burst above the presumed right shoulder level. Although the index underperforms on a Keltner basis (not shown so that the other formation is more visible), as long as it's producing daily closes above about 7,300, the potentially bearish formation appears to be negated.

Will the DJT stay above about 7,300, however? The Dow Jones Transports' behavior had been worrisome when compared to other indices. It tends to lead more than follow, and it certainly wasn't leading to the upside. Today's candle showed that the index pulled back well off its high of the day, leaving behind a long candle shadow that took up more than half of today's range. That's a potentially bearish signal. The DJT doesn't always heed such signals. See 10/22/13, for example. However, this bears watching. If this index should roll over sharply, it may have just temporarily overrun a boundary today, as it sometimes does.

Tomorrow's Economic and Earnings Releases

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

What about Tomorrow on Intraday Charts?

Annotated 30-Minute Chart of the SPX:

The SPX broke through its widest Keltner channel on this 30-minute chart but couldn't maintain the breakout through the end of the day. That converts this morning's higher levels to potential resistance, joining with potential Keltner resistance, too. The SPX needs to sustain 30-minute closes above today's high for a new breakout, and resistance on 30-minute closes could now begin as early at about 1,853 on a retest. Turn to the daily chart for a new upside target if the SPX sustains 30-minute closes above today's high.

Sustained 30-minute closes beneath a turning-lower red 9-ema maintains a potential downside target of 1,841-1,846, and the SPX was heading toward that target as the day closed. Lower potential targets, if needed, are currently at about 1,830-1,836 and 1,806-1,812.

Annotated 30-Minute Chart of the Dow:

The Dow's behavior today converted the 16,255-16,304 zone to potential resistance on 30-minute closes. According to Keltner evidence, the Dow would need to sustain 30-minute closes above about 16,304 before it has broken out to the upside. Look to the daily chart for a next potential upside target if that should happen.

This afternoon, the Dow headed straight down into the next potential downside target, from about 16,172-16,206. Sustained 30-minute closes beneath about 16,255, however, maintain that target. Support there could bounce the Dow again, but that's not a given, of course. Additional lower targets, if needed, are at about 16,060-16,108 and 15,847-15,887.

Annotated 30-Minute Chart of the NDX:

The NDX's action converted the range from about 3,694-3,706 into potentially strong resistance on 30-minute closes. I can't suggest that you turn to the daily chart for a new upside target if the NDX should sustain 30-minute closes above that zone because it would have outrun Keltner-style targets on that chart, too.

As long as the NDX sustains 30-minute closes beneath the red 9-ema, it maintains a potential downside target from about 3,675-3,684, with the top of that target nearly reached this afternoon. Lower potential targets, if needed, can be found at 3,645-3,660 and 3,590-3,600.

Annotated 30-Minute Chart of the Russell 2000:

The RUT's pattern is slightly different. It still has potentially strong support immediately underneath the current RUT price. Still, the evidence today suggested that the zone from about 1,173-1,181 is one of potentially strong resistance on 30-minute closes. If the RUT breaks out above that zone on 30-minute closes, it will still be challenging potentially strong resistance on the daily chart, too, so whether it is likely to reach for the next upside target on that daily chart would be uncertain, at least through the end of the day, if not longer.

If the RUT sustains daily closes beneath about 1,173, it will have set up a potential downside target from about 1,165-1,170, where potentially strong support on 30-minute closes might be found. Subsequent lower Keltner targets, if needed, are currently located at about 1,154-1,161 and 1,136-1,140.

When I started out writing this article, I concluded the action today had been bullish. By the time I concluded editing it, however, it didn't appear as bullish. Let's sum up.

The bullish evidence: The SPX and Dow have reinstituted their rally patterns, forming daily closes at or above a rising red 9-ema. Their behavior with respect to those moving averages can help guide your impression of the sustainability of their rallies. For now, they're rallying, but both left behind significant--if not clearly short-term bearish--upper candle shadows today. That tarnishes the shiny bullish picture. If they begin chopping back and forth across a flattening 9-ema, their strength may be waning, at least temporarily.

The should-be-watched-closely evidence: The NDX continues to climb, but it's climbing along the top trendline of a broadening formation without quite breaking north of that formation. The RUT's climb off its February low has been crazy making for anyone in a non-directional RUT trade, but it paused today less than two points below its previous high and right where Keltner evidence also suggested there would be strong resistance. Both of these fast-moving indices face likely strong resistance with the outcome of these tests as yet unknown.

The potentially bearish evidence: The DJT, one of our indicator indices, broke higher, but it retraced much of its gains and ended up below the 50-percent mark of the day's range. That's a clear bearish signal, but the DJT doesn't always obey such signals.

Couple these impressions with the fact that the RUT's gains and almost uninterrupted streak of days with higher highs suggests that the rally off the February low should be getting a little long in the tooth. The RUT has had other long periods when it streaked higher, so we must think in terms of deciding how best to protect bullish trades rather than counting our bearish gains before they're accumulated. Once upon a time, I was fairly good at predicting next market direction, but now it's often best to think in terms of likely ranges either up and down and develop what-if plans for either.

Neither the VIX nor the RVX, the RUT's volatility index, have dropped into zones that usually prompt reminders about risk of a rollover in equities. They're not providing any clarifying information.

Linda Piazza