Market Internals


President Obama traveled to The Netherlands today to take part in G7 meetings. He met with representatives of Canada, France, Germany, Italy, Japan, the United Kingdom, the European Council and the European Commission to discuss the further threats that might be offered by Russia's actions and the steps that G7 members might take. The resultant Declaration of the Hague Convention of the G7 said that they affirmed support for Ukraine's sovereignty, territorial integrity and independence, as well as for the people of Ukraine. They reiterated that international law had been broken when Russia illegally attempted to annex the Crimea. They affirmed that "significant consequences" would result, with those applied individually and collectively. They reminded Russia of its international obligations and warned that it had a clear choice as to whether to avail itself of diplomatic avenues. They said that Russia's support for the Organization for Security and Cooperation in Europe's Special Monitoring Mission to Ukraine was "a step in the right direction." They vowed not to participate in the upcoming G8 Sochi Summit or any G8 meetings "until Russia changes course." They agreed that the IMF has a central role in supporting reform in the Ukraine and urged the IMF to "reach a rapid conclusion." They want the cooperation of the World Bank, the EU, and other financial institutions and believe that the work of the IMF is crucial in obtaining the needed financial backing to the Ukraine.

Commodity markets and equity markets in the U.S. appeared more riveted on what would happen with interest rates than with the G7 meeting. Today San Francisco Federal Reserve President John Williams denied that the FOMC suggested last week that interest rates would be raised sooner than had previously been believed. Many Fed watchers had interpreted FOMC Chair Janet Yellen's speculation that rates might rise about six months after stimulus ends as a moving up of the timetable for rate hikes. Williams also denied that one of the charts presented by the FOMC and showing that the committee expected slightly higher interest rates at the end of 2016 proved that rate hikes would occur sooner than previously expected. He said that chart was "just a reflection that the economy has gotten a little bit better and interest rates might be just a little higher" than previously thought (Washington Post). Although Williams is a non-voting member of the committee this year, several articles characterized him as an ally of Chair Yellen.

The SPX dropped 0.49 percent; the Dow, 0.16 percent; and the NDX, 0.98 percent. The RUT lost 1.30 percent, and the SOX, 0.46 percent. Momentum stocks such as FB and GOOG suffered today.

Those momentum stocks weren't the only securities that suffered. Gold futures (/GC)for April delivery settled at 1311.20, down 24.8 points. The drop in gold futures was the largest seen in almost three months, with the blame being assigned to FOMC Chair Janet Yellen's "six months" statement from last week. Several metals analysts commented that gold doesn't tend to perform well in a rising-rate environment. Silver futures (/SI) for May delivery settled at 20.067, down 0.243. Copper futures (/HG) for May delivery settled at 2.9455, down 0.0050. Light sweet crude futures (/CL) for May delivery settled at 99.60, up 0.14.

Monday's Developments

Monday's market developments begin with overnight trading in Asia. This weekend, the deputy governor of China's People's Bank of China suggested that the country might allow some debt defaults to occur in the wealth management market, according to news source AFP. The deputy governor expressed the belief that such defaults would help to regulate the markets and lead those involved to better manage risks.

In addition to that news, the HSBC March Manufacturing PMI for China measured 48.1, slipping lower than the expected 48.7 or February's 48.5. March's result marked an eight-month low for production. One bright spot was the increase in new export orders. Employment decreased again, but its rate of decrease slowed. However, there was nothing good in output and new orders computations in this report: each fell at a faster rate.

HSBC's chief economist for China and co-head of Asian economic research said that the weakness had been broad based. He predicted that China's government would likely introduce policy measures meant to stabilize growth as a result of the weakness. Spending on infrastructure such as subways, measures meant to lower rates and measures to make it easier for private investors in business could be employed, he said.

Market watchers had expected to see further weakness in China's PMI numbers. Perhaps, in Asia, they expected worse than they saw or some market participants were cheered with thought of those measures the government might take to boost the economy. Asian bourses rose after that report. The Nikkei 225 gained 1.77 percent; the Hang Seng, 1.91 percent, and the Straits Times, 1.25 percent. China's Shanghai Composite rose 1.91 percent.

In Europe, Markit's Flash Manufacturing and Services PMI surprised to the upside in France, coming in above the benchmark 50 rather than below it. Germany's results disappointed, however, although the headline numbers were still well above the benchmark 50 for both manufacturing and services, at 53.8 and 54.0, respectively.

Perhaps Germany's disappointing figures, carryover worries about the effects of a slowdown in China, and further upheaval in the Crimea all hit Europe this morning. Ahead of this week's G7 meetings, news sources this weekend featured scenes of Russian troops breaking through barriers at the last remaining Ukrainian military post in the Crimea. In addition, the NATO commander warned that Russia was amassing a strong force on the Ukrainian border and might also be planning to invade Moldova.

European bourses dropped in broad-based losses, but with Spain's financials hit hard. The FTSE 100 lost 0.56 percent; the DAX, 1.65 percent; and the CAC 40, 1.36 percent. Spain's IBEX 35 dropped 1.39 percent, and Italy's FTSE MIB, 1.65 percent.

What about U.S. reports? The Federal Reserve Bank of Chicago released its Chicago Fed National Activity Index (CFNAI) for February, with the CFNAI beating expectations. Unlike reports produced by many of the Fed banks, the CFNAI computes national rather than regional results, measuring both economic activity and inflationary pressures. A benchmark number of zero delineates growth versus contraction.

The Chicago Fed reported the CFNAI at 0.14, above the consensus 0.10, the prior -0.39 and the prior revised -0.45. Once again, market watchers have been waiting to see if the "brutal weather" explanation for weakness early this year held true, with indicators reversing higher again in subsequent months. This result encouraged the belief that the lower economic results early in the year were a temporary, weather-related blip.

Under the influence of that downward revision to the prior number, the three-month average dropped to -0.18, however. That was the first time that three-month average dropped below zero in six months, the Chicago Fed noted in its report, meaning that the national economic index drifted lower than its historical trend.

The CFNAI Diffusion Index fell to -0.06, down from January's +0.03. The Chicago Fed explains that this diffusion index measures how broadly the 85 indicators it uses contributed to the result in the monthly index. This time, 54 out of 85 indicators made positive contributions while the rest made negative contributions.

Drilling down beneath the number, the Chicago Fed said that -related indicators drove the number higher in February, and that's good for those hoping for strength. Production-related indicators added 0.26 to the CFNAI. Employment made a negative contribution of -0.02, however. Consumption and housing also made a negative contribution but were less negative than they had been in January.

Soon after the CFNAI, Markit released its latest U.S. Flash Manufacturing PMI, with that March number disappointing expectations. At 55.5, it was lower than the expected 56.6. The prior, revised-higher number was 57.1. The news was not bad when the results were examined with more care, however.

For example, Markit noted that February's manufacturing PMI had measured a 45-month high, so the fact that the March number slipped lower than that 45-month high did not signal weakness, Markit concluded. The headline number was still the second highest since January, 2013.

Both output and new orders rose sharply, Markit's summary said, although elsewhere in the report, the increases to 57.8 and 59.6, respectively, were characterized as expansions at slower rates. Manufacturers said new work pushed those orders higher along with efforts to take care of their backlogs. Order growth was hampered by "subdued export demand," Markit said.

Employment increased another month, with employment growth stronger than seen on average. Respondents to Markit's survey expressed confidence about the U.S. economy's growth and business outlook. Markit remarked on five successive months of higher levels of input buying, affirming that greater confidence. Output, new orders, new export orders, employment, backlogs of work, stocks of purchases and quantities of purchases all increased. Stocks of finished goods contracted and suppliers' delivery times lengthened.

Output and input prices both rose. Markit noted that the rate of inflation remains lower than that typically seen over the last five years.

The first quarter's average rose to 55.4 from 53.8 from the fourth quarter of 2013, so Markit's results differed from the Chicago Fed's CFNAI with respect to three-month averages. Markit said respondents to its survey reported improving economic fundamentals amid a continuing catch-up effect after the weather conditions seen earlier in the year. In summary, Markit believes this quarter's performance will provide "a robust contribution to GDP."

Futures had been positive leading into this release. What happened? Perhaps not so cheery to some market participants was another assertion. That assertion was Markit's conclusion that the strength of these numbers would likely encourage the Fed to continue its taper program. Coming after last week's concerns that asset buying would end sooner than expected and tightening might appear sooner than expected, these results might have spooked equity markets already worried about geopolitical developments.

Moody's weekly Business Confidence measured 36.4, inching slightly lower from last week's 36.6. Moody's still describes the sentiment as being in tune with an economy that is growing well above its potential.

Story stocks today include Apple (AAPL, 539.19, up 6.32 or 1.19 percent) and Comcast. The Wall Street Journal reported this weekend that the two companies are talking about a service that would employ an Apple set-top box to stream content stored in the "cloud" to Comcast customers. The deal would ensure Apple special treatment that would avoid congestion on the web. Netflix (NFLX, 378.90, down 27.09 or 6.67 percent) and Comcast have already announced an agreement that would allow Netflix content to escape some of the buffering that slows content. NFLX dropped heavily with this announcement.

Some business commentators were soon decrying the possible deal, however, pointing out the deal offered no advantages to Comcast and could offer risks by angering those in favor of net neutrality. I wonder if Comcast cares about net neutrality advocates?

AAPL was in the news for another reason. As has become increasingly common in recent weeks, analysts were speculating on the launch of AAPL's iPhone 6. Some analysts believe that launch will be late summer or early fall.

Speculation about AAPL caused grief to another company, Pandora Media, Inc. (P, 31.39, down 2.62 or 7.70 percent). Speculation that AAPL is considering an iTunes app for Google's Android mobile devices was deemed responsible for P's drop.

Cisco Systems (CSCO, 21.57, down 0.07 or 0.32 percent) will spend $1 billion to enter the the cloud computing services market, a WSJ article revealed.

Twitter (TWTR, 47.77, down 2.15 or 4.22 percent), however, will be exiting one of its services: the music service. The app will be removed from Apple's iTunes store.

Analysts who parsed Wal-Mart's (WMT, 76.76, up 0.66 or 0.87 percent)10-K noted that the company had included, among the other risks to its expected performance, the impact of changes in the Supplemental Nutrition Assistance Program (SNAP)and other public assistance programs. This isn't news, yet it was getting lots of coverage. Common sense and WMT's previous statements have made it clear that WMT is impacted when the most on-the-edge people in the economy receive fewer benefits.

Independent oil and gas company Goodrich Petroleum Corp. (GDP, 14.17, up 0.31 or 2.24 percent) announced that its well in Amite County, Mississippi was producing a peak 24-hour average production rate of 950 BOE to date. Nine hundred barrels of oil and 300 Mcf of gas comprised the mix. The well's production was in the lower end of the company's target. The company also updated on other wells.

Herbalife (HLF, 52.86, up 3.32 or 6.70 percent) said today that it had restated and amended its agreement with Carl Icahn and others who own, altogether, about 16.8 percent of the company's outstanding shares (Icahn Parties). HLF will nominate three of Icahn Parties' designees to serve on the board of directors. Also, two employees of Icahn Enterprises will be nominated to directorships.

Chinese regulators fined Nu Skin Enterprises (NUS, 88.66, up 13.66 or 18.21 percent) $500,000, saying the company had sold illegal products and misled customers. The company says that it's correcting the issues that led to the fine. The stock price jumped.

Regulators in Asia slowed down the completion of Nokia's (NOK, 7.22, up 0.05, 0.70 percent) sale of its devices and services division to Microsoft (MSFT, 40.50, up 0.34 or 0.85 percent) The deal should be completed in April, NOK said. Some analysts expressed concern that NOK may have to agree to patent concessions to obtain that regulatory approval in Asia.

Wintergreen Advisors, shareholder in Coca-Cola (KO, 38.40, down 0.04 or 0.10 percent), expressed concern over KO's equity plan for 2014. Wintergreen, in a letter to KO's board of directors and Warren Buffett, also a KO shareholder via Berkshire Hathaway, quarreled with the amount of money transferred from shareholders to the members of the company's management team. KO countered that those members of the management team would have to meet specific business goals to collect those funds.

Network security firm Palo Alto Networks (PANW, 73.13, down 3.43 or 4.48 percent) said today that it was acquiring Tel-Aviv cybersecurity firm Cyvera for $200 million. Cyvera is privately held. The deal is expected to close the second half of 2014's financial year.

Jim Brown discussed Lions Gate (LGF, 28.66, up 1.06 or 3.84 percent) in detail in this weekend's Wrap. The company's "Divergent" movie sales of $56 million last weekend topped estimates, the company reported today.

Let's look at daily charts. Last week, the setup on weekly charts had suggested the possibility of a reversal, perhaps after a week of consolidation. Last week's trading produced the consolidation. Does today's decline make that reversal a stronger possibility?


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 Keltner Channels and Moving Averages:

This legend provides values for the SPX, but the same moving average and Keltner setup pertains to all the charts utilized in this Wrap.

Annotated Daily Chart of the SPX:

Last week's consolidation shows up when we consider how the SPX performed with respect to its 9-ema on the daily chart. Instead of climbing along the spine of a rising 9-ema, the SPX chopped back and forth across a flattening 9-ema. Because that moving average is flattening, it doesn't currently serve well as a bullish/bearish delineation. However, consistent daily closes below it, especially if those are consistent long enough to turn that moving average lower, would obviously be more bearish than bullish. The reverse is true of consistent daily closes above the moving average if it's turned higher again.

For now, strongest nearby potential support on daily closes appears to be at the confluence of historical and Keltner support from about 1,833-1,848. Until that support zone breaks, we can't assume anything except that the SPX is again retesting former resistance from late December and mid-January. Has that former resistance on daily closes been converted to support, as appeared to be true when it was retested in March?

Consistent daily closes beneath 1,833 appear more concerning and could result in a quick trip down to next Keltner support on daily closes near 1,780-1,800. That support also joins with known historical support.

The Keltner setup suggests that if support near 1,780 is broken on consistent daily closes, the long-term tenor has changed. In Keltner terms, a next downside target is set near 1,680-1,693, but we should not ignore the potential support offered near 1,740, where February's decline stopped, or potential round-number support near 1,700.

What about a more bullish case? Since the SPX is chopping back and forth across the red 9-ema, a rush back up to test the recent high just under 1,884 or even the next potential upside Keltner target near 1,894-1,912 can't be ruled out yet. Although the 9-ema doesn't serve as strongly as a benchmark in its current flattened state, consistent daily closes back above it would lend more credence to a resistance test.

Annotated Daily Chart of the Dow:

The Dow's setup proves similar. I've marked the support/resistance region surrounding the 9-ema, but that 9-ema has flattened. The Dow chops either side of it without predicting much about next direction. The Keltner setup suggests nearest strong support on daily closes at about 16,066-16,187. That potential support zone also corresponds to the swing high from late November and the swing lows earlier in March. The Keltner configuration suggests that sustained daily closes below about 16,066 would set up a next potential downside target near 15,862-15,967. Of course, the round-number support near 16,000 intervenes, and bears would do well to protect short-term bearish gains if the Dow should approach 16,000.

In case this is the beginning of a sustained downturn, lower potential downside targets are also marked. The Dow's narrow composition makes it easier to push around, and it sometimes overruns boundaries, including Keltner channel lines. However, overrunning the potential support zone from about 15,600-15,700 for more than a few days suggests a retest of the early February low might be next.

Long-term bulls do not want to see that February low exceeded on daily closes for more than a day or two. Such a move would confirm a lower high this month, as compared to the 16,588.25 all-time high, and would likely damage market sentiment. Remember that to most of the investing public, the Dow is "the market," despite its narrow composition. I've marked one lower potential downside target, too.

Since the chop back and forth across the flattened 9-ema doesn't tell us much about next direction, we have to consider that the Dow could head higher again. If the Dow heads higher again, the Keltner configuration suggests a next potential upside target near 16,580-16,707, where the Dow might again hit potential resistance on daily closes. That development would constitute a retest of the 12/31 swing high, too. A higher potential upside target is also marked if the Dow should maintain daily closes above 16,707.

Annotated Daily Chart of the NDX:

The NDX has dropped well away from the top trendline of its broadening formation. If you're old school, you would note that today it also confirmed the head-and-shoulders formation from the late February/early March/middle March formation. Those formations that used to guide our trading decisions no longer prove as reliable as they did before the advent of algorithmic trading, but it's still a more bearish than bullish sign.

Short-term bulls would like to see the NDX producing consistent daily closes back above about 3,636 as soon as possible to negate that formation. Such closes back above 3,636 might increase the chance that the NDX can power up to test the next potential resistance, likely to be located at about 3,660-3,700. Consistent daily closes above about 3,700 would set up a potential retest of the top trendline of that broadening formation. A potential resistance zone is marked on the chart.

The scarier proposition to bulls is that consistent daily closes below about 3,578 suggest a decline to the next potential Keltner target at about 3,484-3,522. The NDX, like the Dow, tends to overrun Keltner boundaries, but prices often get mired nearby, so they do offer at least some guidance as to where the NDX might go. Sustained daily closes beneath about 3,484 would appear serious, a change in the long-term behavior of the NDX, setting up that lowest potential target near the lower boundary of the broadening formation.

Annotated Daily Chart of the RUT:

Leading into this week, the RUT had also been chopping back and forth across a flattening 9-ema, demonstrating that the upward momentum had waned. The 9-ema became less sound of a benchmark for bullish-versus-bearish behavior.

Today, the RUT dropped to test the next Keltner potential downside target, with its potential support on daily closes extending from about 1,164-1,178. This zone includes the swing high from January as well as the middle-March swing low, verifying that this is a potentially important support zone. If the RUT produces daily closes below this Keltner configuration for more than a day or two, it tends to fall all the way to the next Keltner target, currently at about 1,120-1,133. A sustained break through that support would be particularly significant since it's been many years since the RUT has broken that support currently at about 1,120-1,133 for more than a few daily closes in a row.

What about the more bullish case? Even with a cursory glance at the RUT's daily chart, we can find many times when tall red candles are followed by tall white candles. Those candles sometimes soon push prices back up through the red 9-ema and on their way into another rally. For now, we have to presume that the red 9-ema could offer resistance on daily closes, but if the RUT should bounce hard back up through the red 9-ema, and particularly if it should sustain daily closes above about 1,205, it sets a next potential daily target from about 1,213-1,230. The RUT's advances have tended to top out near that Keltner configuration marked by the green rectangle, sometimes pushing it a bit higher before succumbing to its resistance.

Annotated Daily Chart of the VIX:

The Monday after quadruple witching can produce wonky values for the VIX as market participants decide on their outlook on the market 30 days ahead. Last week, as the SPX chopped back and forth, the VIX dropped, and today's action didn't do much to clarify its next direction or that of the SPX and other indices. Keep it on your radar screen, however.

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 the 60-minute Charts?

Because of the choppiness over the last week, the 60-minute charts provide a better overview than the 30-minute ones.

Annotated 60-Minute Chart of the SPX:

As the SPS has been chopping back and forth, it's held most 60-minute closes within the flattening purple Keltner channel based on the 45-ema. Today, the SPX dropped to the bottom of that channel, pushing the boundary lower, and bounced back to a configuration that could well provide significant resistance on 60-minute closes. That resistance extends from about 1,860-1,867. Consistent 60-minute closes below that zone, particularly below the lower end of that zone, might suggest that the SPX would turn down again toward today's low. Next potential support on 60-minute closes might exist from about 1,842-1,848. Sustained 60-minute closes below about 1,842, particularly if price then confirms by dropping below about 1,839, suggest a potential short-term price target of 1,815-1,820.

What about the case for upside movement? If the SPX sustains 60-minute closes above about 1,867, it sets a potential price target at about 1,875 or perhaps even 1,880-1,885, where it could again encounter significant resistance on 60-minute closes. A higher potential price target is also marked in case the SPX can maintain 60-minute closes above about 1,885.

Annotated 60-Minute Chart of the Dow:

The Dow did not drop all the way to the bottom of the Keltner channel that is now marked by potential support on 60-minute closes from about 16,100-16,150. Yet, the Dow's rise this afternoon was thwarted when prices got tangled up by potential resistance on 60-minute closes that extends from about 16,265-16,325. Sustained 60-minute closes below about 16,265 would suggest that the Dow is again setting a potential downside target near 16,100-16,150, but we all know that some traders are going to be watching today's low for bounce possibility, too, so short-term bears should be watching for that possibility if they're guarding profits.

A lower potential target is also marked on the chart in case the Dow sustains 60-minute closes below about 16,100. It's likely that potential support could be compressed back down near 16,050, too, so short-term bears should be aware of that possible support, too.

What about the bullish case? Sustained 60-minute closes above about 16,325 set up a potential upside target at 16,350-16,375, although the potential resistance there would possibly be pushed higher, toward the next Keltner target at 16,450-16,485. A higher target is potential target is also marked.

The problem with chop is that it chops out lots of possible support/resistance levels and provides little insight into which are the most important and which can be ignored. That's true of all the potential support and resistance levels inside the purple channel's boundaries.

Annotated 60-Minute Chart of the NDX:

The NDX's weakness relative to the previous two indices shows up on this Keltner chart. The NDX broke through the purple Keltner channel's boundaries today, and its afternoon bounce brought it up to again challenge the lower boundary. Consistent 60-minute closes beneath about 3,615 set up that potential lower target now at about 3,560-3,570.

What about the more bullish case? If the NDX can instead sustain 60-minute closes above about 3,628, it sets a next potential upside target near the midline of the flattened Keltner channels, with potential resistance on 60-minute closes gathering from about 3,657-3,675. There's danger that the NDX could again be turned down by that gathering resistance, but if it can sustain 60-minute closes above about 3,675, it sets a next target at the top of the purple Keltner channel, with resistance there likely to be pushed up toward 3,710-3,720 by such a move.

Annotated 60-Minute Chart of the Russell 2000:

The RUT also fell through the lower boundary of the purple channel in which it had mostly been chopping sideways. Sustained 60-minute closes below about 1,177 again set a potential downside target of about 1,153-1,157, but bears would have to be aware that today's low could provide some support, too.

The RUT needs to sustain 60-minute closes above about 1,182 before it sets a new potential upside target. That target would be at about 1,187-1,192. Resistance on 60-minute closes could be significant there and could send the RUT back again to retest the lower boundary of the purple channel. However, sustained 60-minute closes above about 1,192 set a next potential upside target at about 1,203-1,207. A higher potential target is also marked.

Choppy market conditions over the last week have chopped out wide consolidation bands that make predicting next directions difficult while prices move within those bands. Some indices such as the NDX and RUT broke below last week's consolidation band. That's concerning when they appear to lead to the downside. Both bounced well off today's lows by the close, clouding the interpretation of today's events, but both appeared to stall again at the first resistance test. Neither broke convincingly back up inside the purple channel that had been containing prices. In the old days, I would have taken this as a sign that more weakness was coming and likely would have gone home with a speculative put or two. I don't speculate on direction any longer.

Take seriously any movement that pushes prices below today's lows on these two indices unless there's a quick reversal from such a move. However, let's be honest. We live in a different time than we did previously, when chart formations such as head-and-shoulders or double tops or even movements above or below key support/resistance levels could reliably predict next movements. Futures movement during overnight trading sometimes decide the next day's direction before we're even awake, and that direction may be contrary to any predicted on the charts. Please build scenarios for movements either direction.

Linda Piazza