Market Internals


When indices closed near or at their lows last week, follow-through selling could have been expected today. The behavior of other global indices and renewed political tensions helped contribute to the get-me-out mood of some market participants. In addition, worries about the new earnings season probably contributed to the behaviors of the market.

This weekend, pro-Russian demonstrators stormed government buildings in Donetsk and Kharkiv, two cities in the east of Ukraine, with other reports saying that buildings were seized in a third or fourth city, too. In the Crimea, a Ukrainian naval officer was shot and killed by a Russian soldier. The U.S. will reportedly send a Navy ship to the Black Sea, and various politicians spoke out today, with various opinions about whether there was or was not a buildup of Russian forces on the border with East Ukraine.

That follow-through selling did occur. By the end of the day, the SPX had erased the year's gains. The Nasdaq had seen its largest three-day loss since 2011.

The SPX dropped 1.08 percent; the Dow, 1.02 percent; and the NDX, 0.89 percent. The RUT tumbled 1.53 percent, and the SOX, 0.91 percent. The Dow Jones Transports (DJT) fell 1.36 percent. Momentum stocks tended to be hit hard. Consumer staples, telecom services and utilities outperformed, with all of those considered defensive sectors. The DJU, the Dow Jones Utility Average lost ground, but lost only 0.37 percent. The IBB, iShares Nasdaq Biotechnology, gained 0.67 percent after being down hard again last week. Although some pharmaceutical companies gained today, the defensive healthcare sector did not perform as well as the other defensive sectors.

Treasuries rose. Yields for the ten-year T-Notes dropped to 2.6950 percent, down 1.14 percent, and yields on the thirty-year fell to 3.5580 percent, down 0.75 percent. Gold futures (/GC)for June delivery, the highest volume contract, settled at 1298.30, down 5.2 points. Silver futures (/SI) for May delivery settled at 19.907, down 0.39 points. Copper futures (/HG) for May delivery settled at 3.0395, up 0.0170. Light sweet crude futures (/CL) for May delivery settled at 100.44, down 0.70.

Monday's Developments

The rise of the yen against the dollar contributed to weakness in Japan. Also this weekend, Japan made public an order that had been issued Thursday. That order directed a destroyer in the Sea of Japan to strike any missiles North Korea might launch into the Sea of Japan from April 3 through the 25th. This was in response to a missile fired last week. North Korea's launch was considered an act of defiance.

Of course, Friday's sharp decline in U.S. equity indices probably also added to concern. The Nikkei 225 lost 1.69 percent; the Hang Seng, 0.59 percent, and the Straits Times, 0.60 percent. China's Shanghai Composite was shuttered for a bank holiday.

In Europe, financials underperformed. Speculation continued that the ECB will have to step in with some sort of asset-buying program, and European officials continued to deny that there would be any such measures any time soon.

In addition, Credit Suisse has said it is setting aside an extra $480 million as provisions against U.S. tax and security related matters. These funds are in addition to funds already set aside to deal with a Department of Justice investigation into whether the bank helped U.S. taxpayers evade taxes. In that case, the Department of Justice is said to want a guilty plea in return for assigning fines rather than issuing an indictment. The new problem that has required the bank to set aside additional funds is a civil investigation separate from the criminal federal case. New York's financial services superintendent has now sought documents from both Credit Suisse and a Senate subcommittee to determine whether the bank misled New York investigators in previous investigations.

The FTSE 100 lost 1.09 percent; the DAX, 1.91 percent; and the CAC 40, 1.08 percent. Spain's IBEX 35 fell 0.66 percent, and Italy's FTSE MIB, 0.84 percent.

The U.S. economic calendar was light today, the first Monday of the earnings season. Gallup's March U.S. Consumer Spending Measure, focused on daily discretionary spending, said that in March daily average spending remained at $87, the same level as February's. Gallup noted that although the daily average spending level remained high in comparison to spending over the past five years, a short-term change in pattern had occurred. Since the recession ended, March had always gained at least a little from February's number. In addition, the current March's $87 average daily spending was below last March's $89 average.

Moody's weekly Business Confidence inched down to 35.5 from last week's 35.6. Moody's had noted last week that businesses were a little more cautious about current conditions than they had been previously, but that sentence disappeared from this week's report summary. Moody's calls sentiment "especially good, consistent with an economy that is expanding above its potential." One strength might not be so welcome in this time when market participants worry about when asset buying might end. More companies plan to hire, Moody's said, with almost half those responding noting plans to hire. Only 10 percent plan to reduce payrolls, Moody's said.

At late morning, St. Louis Federal Reserve Bank President James Bullard spoke in Los Angeles. He doesn't believe that central banks need to coordinate their monetary policies to avoid the kind of problems seen with emerging markets when the Fed announced the taper. He believes that inflation is ready to go higher but said that care needed to be exercised before changing the pace of the taper procedure. Bullard is not a voting member of the FOMC this year.

Near the end of the trading day, the Consumer Credit for February was announced. The month-over-month change from January's report showed the number rising $16.5 billion from the prior revised-higher $13.80 billion. This beat expectations of $14 billion, but as happened last time, gains in non-revolving credit pushed the number higher. Revolving credit dropped again. Revolving credit would be the kind of credit employed with credit cards. Non-revolving credit would be the kind employed when purchasing a car and repaying the loan of a fixed amount for a fixed course of time.

Late in the day, the Congressional Budget Office announced that the U.S. had a March budget deficit of $36 billion. March 2013's budget deficit had been $107 billion. Spending was reduced 2 percent and receipts increased 15.5 percent. The first half of the fiscal year has also been completed. The $413 billion deficit is $187 billion less than the half-year deficit of a year ago.

Story stocks included a number of pharmaceuticals, of interest since that group was recently hit with big selloffs, contributing to Nasdaq weakness. Alexion Pharmaceuticals Inc. (ALXN, 145.66, up 3.16 or 2.22 percent) rose. Less liquid Agios Pharmaceuticals Inc. (AGIO, 45.35, up 9.87 or 27.82 percent) jumped after the company announced encouraging results for its experimental leukemia drug, although the trial included only seven patients. I don't usually cover stocks that trade under 1 million shares a day since there might be liquidity problems, but pharmaceuticals have figured highly in the recent downturn, prompting this mention.

Biopharmaceutical company MannKind Corp. (MNKD, 6.32, down 0.55 or 8.01 percent) wasn't so lucky. The company announced that the FDA was extending its review of MNKD's Afreeza drug, an insulin therapy. Last week, an FDA panel had backed the drug. It's the company's first drug.

Mallinckrodt Plc (MNK, 60.95, down 1.57 or 2.51 percent) will acquire Questcor Pharmaceuticals Inc. (QCOR, 80.57, up 12.71 or 18.73 percent) for $86.08 a share, a 27-percent premium over Friday's closing cost. The purchase provides MNK with access to QCOR's MS drug.

Valeant Pharmaceuticals International, Inc.(VRX, 119.23, down 5.46 or 4.38 percent)and Swedish specialty pharmaceuticals company Meda, however, have terminated their joint ventures.

Pfizer Inc. (PFE, 31.20, down 0.96 or 2.99 percent) turned lower despite news that the company's experimental breast cancer drug lengthened the time patients lived without a worsening of their disease. Tested in advanced stage cancer patients, however, the drug did not appear to increase their survival rates.

Sears (SHLD, 38.10, down 2.58 or 6.35 percent) completed its spin-off of Lands' End (LE, 29.55) last week, with trading on the LE symbol beginning today. The stock traded 1,151,914 shares in a range from 28.50-31.60.

After the close, Ford Motor Co. (F, 15.91, down 0.19 or 1.18 percent) announced two recalls, with the recalls involving several models and model years. The cars recalled total almost 435,000.

Also after the close, Citigroup Inc. (C, 46.55, down 0.56 or 1.19 percent) announced that it will fork over $1.13 billion to settle claims relating to mortgage securities the bank sold during the mortgage crisis. Eighteen institutional investors will receive those monies. The company painted this as a resolution to a "significant legacy issue from the financial crisis."

This week begins the reporting season, with Alcoa's earnings tomorrow after the close being the first Dow component to report.

Let's look at daily charts.


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 pertains to the SPX chart below, but the Keltner setup is consistent across all charts. It can be referenced for colors of moving averages, etc., on all charts.

Annotated Daily Chart of the SPX:

This morning, SPX prices dropped down to test the potential support on daily closes from about 1,840-1,854. This Keltner support configuration has held as daily support through two previous tests last month, so dip buyers were waiting. The dip buyers were eventually overwhelmed by sellers, however, and the SPX dropped well into that support band. The Keltner setup suggests that sustained daily closes beneath about 1,840 set up a potential downside target from about 1,789-1,807.

That Keltner configuration from about 1,789-1,807 marks particularly important long-term support for the SPX. This Keltner configuration has been support on most daily closes whenever it's been tested since late 2012. This configuration been holding as daily support except for small incursions below it on a few daily closes. The loss of this support on more than one or two daily closes, then, would mark a distinct change in tenor for the SPX. The Keltner setup suggests that consistent closes beneath about 1,789 could set a downside target near 1,700, although some dip buyers can be expected to step in somewhere around 1,740-1,750, where interim support might be possible.

What if the SPX bounces again before it violates 1,789 on consistent daily closes? It will soon run into the potential resistance at historical resistance and the 9-ema, likely to be grouped between about 1,861-1,878. If the SPX can strengthen and sustain daily closes above about 1,878, it sets a potential upside target of 1,904-1,922.

Annotated Daily Chart of the Dow:

The Dow can be pushed around or supported a bit more than the SPX. The Dow took a bit longer this morning to finally reach down into a test of the 16,183-16,281 level. Like the SPX with its analogous zone tested today, the Dow tested that Keltner configuration multiple times last month, mostly holding that support on daily closes. Therefore, sustained daily closes beneath about 16,183 would mark a change in short-term tenor and would set the next potential downside target at 15,930-16,040. Historical, round-number and potential Keltner support all converge in that zone.

If that 15,930-16,040 potential support is lost on daily closes, the Keltner channel setup suggests the next lower potential downside target would be the potential support from 15,700-15,807, with February's swing low an obvious next target below that. A lower potential downside target is also marked on the chart, in case prices cannot be held above February's low on daily closes.

What about upside potential if Dow prices bounce before they violate 16,183 on consistent daily closes? The Dow would soon run into potential resistance at the next marked yellow-orange rectangle. If the Dow can sustain daily closes above about 16,476, the Keltner setup suggests a potential upside target from about 16,642-16,764. A higher potential target is also marked on the chart in case market behavior really brightens.

Annotated Daily Chart of the NDX:

The NDX dropped down to test a Keltner configuration that has provided long-term support to the NDX on daily closes. Losing the potential support on daily closes that spans from about 3,470-3,517 would mark a change in long-term tenor for the NDX. The Keltner setup suggests that the next downside target if that support is lost is way down at 3,200-3,240. That's also near the bottom of the broadening formation that I've been pointing out on the NDX's daily chart. Keep that in mind as a possible long-term downside target, but there's also particularly strong historical support near 3,400-3,420 and also round-number support near 3,300-3,330. While I have seen prices fall toward a seemingly impossible Keltner target, we have all also seen them stopped at some historical support level, too. We can imagine that dip buyers will step in at those historical and round-number 3,400 and 3,300 levels (or just above them) if they are tested. The outcome of such dip-buying behavior, if it occurs, depends on whether there's renewed selling into any bounces. It's always the outcome of the support/resistance test that matters, not necessarily the fact that there was a test.

What if the NDX bounces now rather than continues falling through support levels? If consistent daily closes are above about 3,517, the NDX maintains a potential upside target of 3,588-3,638. Be wary of potential resistance on daily closes at that zone, resistance that could turn the NDX lower again. If the NDX can sustain daily closes above about 3,638, however, the Keltner setup suggests a next upside target of about 3,665-3,706. A higher potential upside target is also marked, in case the NDX can sustain daily closes above about 3,706.

Annotated Daily Chart of the RUT:

As did the NDX, the RUT dropped into a test of an important Keltner configuration, one that has marked long-term support on most daily closes since late 2012. That support extends from about 1,118-1,138, although once the RUT spends considerable time below 1,138, it could push that lower boundary even lower. For now, the Keltner setup suggests that consistent daily closes beneath about 1,118 would mean that the support had been lost and set an eventual potential downside target of 1,030-1,046. However, traders in RUT options should be aware that the RUT chopped out potential historical support levels about every 20 points between 1,060 and 1,120 while it was working its way higher. Any of those could be the focus for dip buyers to step in. As mentioned earlier, I have seen prices fall precipitously toward seemingly impossible downside Keltner targets, so they shouldn't be ignored any more than should potential historical support levels.

What if the RUT bounces? If the RUT maintains daily closes above about 1,138, it maintains the possibility of reaching for its next potential upside target of 1,165-1,176. Sustained daily closes above about 1,176 set a potential Keltner upside target of 1,190-1,200. A higher potential upside target is also marked, if the RUT can sustain daily closes above 1,200.

Annotated Daily Chart of the Dow Jones Transports:

Although this index is not optionable, it provides options traders with a view of the economic outlook. It also either corroborates or argues against the behavior of the Dow, and, to some extent, the SPX and OEX. So far, the Dow corroborates their behavior, testing short-term potential support and remaining well above the Keltner configuration that marks long-term support for those indices since late 2012. So far, the Dow Jones Transports are seeing a pullback, albeit a sharp one. Sustained daily closes below 7,100 would not look good for the other indices or for the economy.

Tomorrow's Economic and Earnings Releases

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

It might be important to note that tonight is the tentative date for the Bank of Japan's Monetary Policy Statement and press conference.

What about Tomorrow?

Because of the volatility in the markets, the 60-minute charts provide a calmer view of what might happen next than do the shorter-interval intraday charts.

Annotated 60-Minute Chart of the SPX:

The 60-minute charts will show how the SPX and Dow outperformed the NDX and RUT, just as the daily charts did. The SPX slipped below Keltner support (purple channel) and produced a number of 60-minute closes beneath it, but found support on 60-minute closes at last week's swing low. Just barely, right? However, the SPX never closely approached the downside target it had set, the red one near 1,820. Bulls want to see the SPX maintaining 60-minute closes above about 1,858 to erase that potential downside target, however, and set a new potential short-term upside target at 1,866-1,871. If weakness has set in, that 1,866-1,871 zone is likely to present strong resistance on 60-minute closes and could turn the SPX lower again.

If this has all just been a rather violent pullback and the SPX can sustain 60-minute closes above about 1,871, the next potential upside target would be at about 1,886-1,890. That target could easily be driven up toward Thursday's high and the siren call of 1,900 if bears are surprised into fueling a sharp rally. Another potential upside target is also marked on the chart.

Annotated 60-Minute Chart of the Dow:

Similarly, the Dow slipped below (purple channel) potential support and sustained 60-minute closes beneath it. Prices never dropped down to last week's low, much less toward the downside target set near 16,000, but, staring at that chart, one gets the impression that if the closing bell hadn't sounded, the Dow might have dropped closer to that target. That target was set by the Dow's sustained 60-minute closes beneath about 16,300.

Bulls would like to see the Dow sustain 60-minute closes back above 16,350 to erase that downside target and set the next potential upside target, but that next potential upside target is nearby, at 16,380-16,440. The Dow hasn't been honoring these central channel lines based on moving averages, so it's difficult to ascertain how strong the resistance might be in that zone or how true those levels are for the Dow. However, that 16,380-16,440 zone suggests that sustained 60-minute closes above about 16,440 set a potential upside target of 16,550-16,600. Historical resistance on 60-minute closes joins potential Keltner resistance on 60-minute closes in that zone, and the Dow's pattern has shown some relevance to the upper boundary of that Keltner channel. Watch for resistance beginning at 16,550 and extending up to last Thursday's high.

Sustained 60-minute closes above 16,600 and any sustained movement above last Thursday's high suggests an upside target near 16,750.

Annotated 60-Minute Chart of the NDX:

Here we see that the NDX did fall to its downside target after it tumbled through support (purple channel) and sustained 60-minute closes beneath it. Not only did the NDX hit the original target near 3,520, but it pushed that lowest (pink) channel boundary--and the target--lower. That lower channel boundary still slopes sharply down and can't be counted on to provide support.

The NDX's first step in changing its tenor would be to sustain 60-minute closes back above 3,540, setting a potential upside target first at 3,550-3,570 and then at 3,590-3,622. Subsequent potential upside targets are marked at 3,640-3,660 and then near 3,760, but both are likely to be driven higher by the time a rally would bring prices up to test them.

The NDX lost about 6.8 percent in its decline from the 3,738.32 recent swing high into today's intraday low. Shorts have been making money. If a bounce goes too far or is maintained too long, shorts are going to buy-to-cover their positions, helping to fuel a sharp--but possibly short--rally. However, I also would not be surprised to see the NDX fall out of that lowest Keltner channel on the 60-minute chart and drop down toward 3,400-3,420. Some of the sharpest declines come out days such as those we've had lately. Be prepared for anything. In these days of HFT, we options traders need to plan how we would deal with a move in either direction.

Annotated 60-Minute Chart of the Russell 2000:

Like the NDX, the RUT fell through its (purple) lower channel support, sustaining 60-minute closes, and then tumbled all the way to the next channel line and beyond. When the RUT originally set the downside target Thursday, that target was near 1,145. The sharp downdraft pushed the (pink) channel's support lower. Even then, the RUT couldn't sustain 60-minute closes above that channel but rather 60-minute closes were at or below that turning-lower channel line.

The RUT has also lost 6.8 percent from its recent 1,212.82 swing high into today's intraday low. If a bounce is sustained too long, shorts will buy-to-cover their position and fuel a bounce. The first task for the RUT bull would be to maintain 60-minute RUT closes back inside the pink channel, and then above about 1,150. That action would set a potential short-term upside target at about 1,164-1,168. The RUT's quick drop has spread its potential resistance lines apart rather than converging them, so it's difficult to pinpoint on which might prove particularly important, but the confluence of the channel lines at the next upside target from about 1,174-1,181 might be. Another higher target is also marked, just in case.

The RUT's position is troublesome, however, as it is close to setting up a momentum run to the downside on this chart. Be prepared for the possibility that the RUT could drop deeper into the support zone it's currently testing on its daily chart, with that support extending all the way down to about 1,118.

The Dow looked ready to drop further at the close. The NDX and RUT are testing support levels that will matter. The Keltner configurations are ones that have mattered since late 2012, at least. These indices are verging on ugly possibilities, and I would say that sustained NDX values beneath about 3,470 and RUT values beneath about 1,118 would be ugly. These indices may be the first to show us that we're seeing a real change in tenor. They may also be the first to show us how far a short-covering-and-dip-buying-fueled bounce could take the indices. If there is such a bounce, will it would gain steam when real buyers step in or roll over again when too many sellers are waiting overhead. They should be watched.

I feel like the grandmother I am when I say this, but in the "old days," we would expect the RUT and NDX to bounce in relief rallies soon, likely influencing other indices to gain, too. We would then expect the first bounces to run into trouble near the red 9-ema's on the daily charts, and then for prices to drop back into a retest or near test of recently made swing low. It would be the response at that retest that would tell us what would happen next. We wouldn't really know about the next direction until we saw that test. I'm not failing to make a decision when I warn that this is not the way markets act these days. They fall sharply, as markets have always behaved when they fall, but they rise just as sharply. Study charts. Prepare a plan of how you will deal with your trade if next upside targets are hit and if next downside ones are.

Linda Piazza