Market participants had many concerns on their minds as the trading week began. Those concerns included increasing violence in the Ukraine, a disappointing PMI for China, lowered GDP estimates for Europe, and anxiety about Federal Reserve Chair Janet Yellen's upcoming testimony. The chair testifies before the Joint Economic Committee on Wednesday and the Senate Budget Committee on Thursday. Those market participants with long memories remember that it was during this testimony last May that then FOMC Chair Ben Bernanke jolted markets with the news that the taper might begin within a few months. Questioning this year will certainly include questions on when rate hikes might be expected.
Although futures were down heavily at the market open neared and indices gapped lower at the open, many indices managed gains. The SPX gained 0.19 percent; the Dow, 0.11 percent; and the NDX, 0.49 percent. The RUT was a laggard, closing down 0.22 percent. The SOX gained 0.07 percent. The BKX, the KBW Bank Index, dropped 0.60 percent, with financials hit hard by news from J.P. Morgan. The DJT, the Dow Jones Transports, one of our bellwether indices, dropped 0.30 percent. Volume was light today, as befitted a market when participants aren't quite sure what to expect next.
Commodity trading also produced light volume on the /GC, /SI, and /HG contracts. The settlement figures will be listed for the highest-volume contract. Gold futures (/GC)for June delivery settled at 1309.30, up 6.4 points. Silver futures (/SI) for July delivery settled at 19.571, up 0.025. Copper futures (/HG) for July delivery settled at 3.0535, down 0.0165. Light sweet crude futures (/CL) for June delivery settled at 99.48, down 0.28 points.
Last night, China's HSBC Final Manufacturing PMI disappointed, measuring 48.1. That was lower than the anticipated 48.4 but up slightly from March's 48.0 estimate. The summary noted that operating conditions had weakened in April. New orders also weakened. Firms cut staff, although at a "modest pace." Many components and the overall result were characterized as indicating a continued contraction, but a contraction at a more modest pace. Input and output costs, however, fell sharply. The summary recognized China's recent reform efforts and acknowledged that those efforts could support growth. The summary concluded that bolder actions would be needed to ramp up the momentum in China's economy.
Coupled with the heightened tension in the Ukraine, that result from China weighed on global bourses across the globe during the Asian trading period. The Nikkei 225 was closed for a holiday. The Hang Seng dropped 1.28 percent, and the Straits Times, 0.34 percent. China's Shanghai Composite, however, saw a late-day bounce that brought that index a single point into positive territory, up 0.05 percent.
European bourses also dealt with a Eurozone growth forecast with mixed predictions. The European Commission's summary mentioned "genuine signs that a more lasting recovery [than any seen since 2008] is now taking place in the EU and the euro area." Those signs included strengthening confidence and business indicators. Even in the most vulnerable member countries, the report noted, the outlook improved. The report projected real GDP growth at 1.6 and 1.2 percent, respectively, in the EU and the euro area in 2014, and 2.0 and 1.7 percent in 2015.
Here comes the sticking point for many market participants. The report also characterized disinflationary trends in the first quarter of this year as stronger than expected. That prompted the downward revision of inflation expectations to 1.0 and 0.8 percent, respectively, in the EU and Eurozone for this year.
As if to back up the European Commission's assertion that the outlook had improved in even the most vulnerable member countries, Portugal's prime minister announced Sunday that the country would exit its bailout program after next month's installment. The country will thereafter obtain its financing from the markets. That will leave Greece and Cyprus still receiving bailout monies.
European bourses had been trading lower through most of their trading sessions, but most managed late-day bounces that took some back into positive territory. The U.K.'s FTSE 100 was shuttered for a holiday today. The DAX lost 0.28 percent but closed well off its low of the day. The CAC 40 managed a gain of 0.10 percent, powering higher as the U.S. bourses bounced off their lows. Spain's IBEX 35 managed a 0.02 percent gain, closing 134.50 points off its day's low. Italy's FTSE MIB didn't make it back into positive territory. It closed lower by 0.65 percent.
Today's slate of U.S. economic releases included the Gallup U.S. Consumer Spending Measure, a measure that purports to track how much consumers spend on a daily basis. The figure excludes regular monthly expenses as well as high-ticket items such as house and car purchases. Gallup reported that April's average spending rose to $88 from March's $87. Gallup also noted that this result is in the high range for the month of April, although Gallup has been gathering this information only since 2008.
Markit's April PMI Services Index measured 55.0 percent, down from March's 55.3 percent. However, experts had predicted that the number would stabilize at 54.2 percent, so the number beat expectations. Markit pointed out that activity rose for the sixth consecutive month, new business growth rebounded, and employment numbers rose marginally. That marginal rise in employment, however, marked the slowest growth since March 2013, Markit cautioned.
Out of seven component measures, only outstanding business contracted, dropping to 47.4 percent from the prior 48.3 percent. New business, however, was growing at a faster rate, at 55.1 percent as compared to the prior 53.0 percent. Still, Markit contributed the subdued rise in employment numbers to a lack of pressure on operating capacity.
Another services PMI number followed shortly. ISM's April Non-Manufacturing or Services Index measured 55.2 percent, beating expectations. Experts had predicted that the PMI would measure 54.3 percent, up from the prior 53.1 percent. This is the strongest ISM Services headline number since the August 2013 number, and the ISM summary noted that this marked the 51st consecutive month that economic activity in the non-manufacturing sector had strengthened.
New orders jumped 4.8 points, measuring 58.2 percent. The business activity/production component jumped even more, by 7.5 points to 60.9 percent. Fourteen service industries expanded while only four reported contraction. The prices index rose to 60.8 from the prior 58.3. However, the employment component dropped 2.3 points to 51.3 percent, with 50.0 percent the benchmark measuring contraction versus expansion. The sampling of comments from respondents sounded optimistic about sales.
Moody's weekly Business Confidence followed. This number inched lower to 29.9, dropping from last week's 30.4. Moody's believes that companies remain optimistic, especially about business through this summer. Forty percent of the respondents noted that they plan to hire while only ten percent plan to reduce payrolls, leading Moody's to call hiring intentions "sturdy." Moody's did note some softness in the assessment of current conditions. Also new to this week's summary was a comment that confidence was weakest in South America.
When reporting the second quarter's Senior Loan Officer Survey this afternoon, the Federal Reserve noted that banks had seen stronger demand for commercial real estate loans and commercial and industrial loans. Those banks had also, on average, eased their lending policies for those types of loans.
The Federal Reserve noted more reports of weaker demand rather than stronger demand for all types of residential real estate loans and stronger demand for credit card and auto loans. The banks on average eased standards for consumer credit card and auto loans and tightened them for non-traditional closed-end mortgage loans.
Story stocks included Target (TGT, 59.87, down 2.14 or 3.45 percent). Although volume was light on the market in general, TGT's decline came on more than double the average daily volume. The company announced that its chairman and CEO had resigned in the wake of the data breaches that occurred five months ago. The breach had frightened customers, and TGT business suffered. The company's chief financial officer will act as interim president and CEO. Target is also searching for a chief information security officer and a chief compliance officer to join the recently hired new chief information officer.
J.P. Morgan Chase & Co. (JPM, 54.22, down 1.36 or 2.45 percent) warned that the trading environment was a challenging one. JPM's volume was also higher than normal. The bank has also incurred legal expenses and lost out to Citigroup in its bid to handle Norway's sovereign oil wealth.
Apple (600.96, up 8.38 or 1.41 percent) rose after a jury decision today, even though AAPL didn't get the extra damages it had sought. The jury kept damages Samsung Electronics must pay AAPL at $119.6 million, the same amount decided upon on Friday. AAPL had said the jurors made a technical mistake, and they were sent back today for further deliberations. AAPL investors will be glad to have AAPL back over $600.00, at least for a day.
Walgreens (WAG, 69.85, up 0.99 or 1.44 percent) hit a record close today. The company reported that April sales rose 8.8 percent.
Companies reporting earnings today included Pfizer (PFE, 29.96, down 0.79 or 2.57 percent). Volume was 54.3 million with average daily volume at 29.5 million. The company reported earnings of $0.57 per share, excluding special items, above expectations of $0.55 per share. Revenue of $11.35 billion missed expectations of $12.08 billion, however. Declining sales of generic medicines due to competition from cheaper generics decreased revenue. PFE is still hoping that it can make a deal with the U.K.'s AstraZeneca. AstraZeneca has already rejected the company's latest offer, made on Friday. If the deal is eventually made, PFE will change its official domicile to London, although it will retain corporate offices in the U.S. That change in official domicile would lower its income tax rate.
Occidental Petroleum Corp (OXY, 94.70, up 0.26 or 0.28 percent) reported earnings of $1.75 per share, beating the Capital IQ Consensus estimate by a nickel. However, revenues of $6.09 billion missed expectations of $6.3 billion. The company's worldwide realized price for crude rose to $99.00 per barrel versus the $98.07 per barrel it realized in the year-ago period. However, daily oil and gas production volumes dropped to an average of 745,000 BOE from the year-ago period's 763,000 BOE.
Tyson (TSN, 38.44, down 4.21 or 9.87 percent) reported profit of $0.60 per share. Volume was more than three times average daily volume. The company had been expected to earn $0.61-0.63, depending on the source estimating the returns. Sales of chicken in China met strong competition from domestic pork. Sales of $9.03 billion beat estimates of $8.8 billion.
After the close, American International Group, Inc. (AIG, 52.72, up 0.71 percent) had dropped to 51.75 as this report was prepared. The company reported earnings of $1.09 a share, better than the expected $1.06-1.07 per share. Net income and after-tax operating income dropped from the year-ago levels. The property and casualty business saw a drop from year-ago levels due to falling investment income and higher catastrophic losses.
Tenet Healthcare Corp (THC, 45.36, down 0.05 or 0.11 percent) also reported after the close. The company reported a loss of $0.33 a share, a bigger loss than the expected $0.15 a share, but far better than the year-ago comparison of a loss of $0.85 a share. Revenue was $3.93 million, higher than the expected $3.89 million.
EOG Resources (EOG, 99.25, up 2.19 or 2.26 percent) was scheduled to report after the close. However, that report was not available through normal sources, including the company's website, as this report was prepared for publication. The conference call was set for tomorrow morning.
Anadarko Petroleum Corporation (APC, 99.49, down 0.08 or 0.08 percent) had jumped to 101.25 as this report was prepared. After the close, the company reported earnings, excluding the cost of a nuclear waste cleanup settlement, of $1.26 per share on revenue of $5.8 billion. Adjusted earnings had been expected to measure $1.13 per share. The company also hiked the midpoint of guidance for its full-year sales-volume. If the settlement payment is included, APC lost $5.30 per diluted share.
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 references today's SPX values, but the Keltner and moving average setups and colors are consistent across all the Keltner charts used in this Wrap. This legend can be utilized for all of them.
Annotated Daily Chart of the SPX:
The market environment seems so tenuous that it's perhaps surprising to look at the SPX's chart. This index is reinstituting a rally pattern of daily closes at or along a rising 9-ema. The daily candles formulated along that rising 9-ema are for the most part small-bodied candles, and they hug that rising 9-ema a bit more than is common in the strongest rallies. They don't yet invite strong confidence in continued gains. However, as long as the SPX produces consistent daily closes at or above a rising 9-ema, we can't argue against the pattern. We can, however, keep our eyes on the approaching April high. The approach to that prior high along with geopolitical and economic uncertainties probably contribute to the hesitancy we're seeing. We know that, but we don't know how it will be settled.
While the Keltner setup suggest a potential upside target of about 1,900-1,920 as long as daily closes are at or above the 9-ema, we know to be watchful of that potentially strong resistance near 1,890-1,900. That's the zone that includes last month's closing and intraday highs. If the SPX successfully breaks through all that resistance and sustains daily closes above about 1,920, the next potential upside target ranges from about 1,930-1,945. Until then, it's possible that any rally would be capped by daily closes at or below about 1,890-1,920.
What about the more bearish case? If the SPX falls through the 9-ema's support and sustains daily closes beneath it, the next potential downside target is at about 1,845-1,863. Sustained daily closes beneath about 1,845 set a downside target near 1,800-1,820. That one would need to hold on most daily closes, or the SPX is breaking a long-term pattern.
Annotated Daily Chart of the Dow:
The Dow has not respected the rising 9-ema as well as the SPX, but it's mostly been producing daily closes at or above a rising 9-ema. As long as the Dow continues doing so, the Keltner setup suggests that it has a potential upside target of about 16,735-16,860. However, we know that massive potential resistance gathers at the triple-top area, from about 16,570-16,632, and that's probably the reason that the Dow's daily candles are also hugging that 9-ema rather than bouncing up from it. The Dow would need to sustain daily closes above about 16,632 before I would believe too strongly in its chances of reaching for that next upside Keltner target. Do not ignore the possibility that it could be reached, however. What's next if it does hit the next target? Sustained daily closes above about 16,860 would set a new potential upside target at about 17,060-17,160, but until then, that 16,800 zone should also be considered potential resistance on daily closes.
If the Dow begins sustaining daily closes beneath the 9-ema, particularly if its actions have flattened that moving average, it sets a potential downside target at about 16,266-16,400. I can't narrow that zone any closer because that zone also includes many opens, closes, highs and lows produced over the last months. That zone's support could bounce the Dow again. If a retest of that zone does not result in a bounce, and the Dow sustains daily closes beneath about 16,266, the Keltner setup suggests a next potential downside target at about 16,060-16,160. If that support doesn't hold on daily closes, historical and Keltner potential support levels alternate at about 16,000 and then 15,780-15,910.
Annotated Daily Chart of the NDX:
The NDX sits in the middle of its broadening formation, but a different formation garners most of the attention from the trading world: the potential head-and-shoulders on the NDX's daily chart. Last Monday's Wrap mentioned that a rally could be stopped at the second-shoulder area. Indeed, the rally that started late last week has been stopped there, so far. The Keltner setup suggests that the NDX would need sustained daily closes above about 3,605 to break out of that right-shoulder area and reject the formation. I've extended that upside benchmark to 3,618 to include the highest close when the first shoulder was being formed. If the NDX does sustain daily closes above 3,618 and break higher, watch for potential resistance on daily closes at 3,630-3,670. Keltner and historical resistance levels alternate above that. Those next potential resistance levels are at historical and round-number potential resistance near 3,700 and then at the suggested Keltner upside target, at about 3,718-3,760. A higher potential target is also marked.
What if the NDX instead sustains daily closes beneath about 3,560? The Keltner setup suggests a next potential downside target at about 3,494-3,530. The Keltner setup suggests that sustained daily closes beneath about 3,494 would then set a potential downside target at about 3,400-3,430. That's an important potential support zone for the NDX on daily closes. A failure to sustain most daily closes at or above that zone would mark a change in the long-term trend for the NDX.
Annotated Daily Chart of the RUT:
The RUT bounced the end of last week, but that bounce was stopped by the first layer of potential resistance on daily closes. That layer extends from about 1,127-1,137. Sustained daily closes above about 1,137 would set a potential upside target from about 1,146-1,160, where resistance on daily closes also looks strong. Two higher potential targets are marked in case the RUT can power through 1,160 this week and sustain daily closes above it. However, 1,800 must also be recognized as potentially strong resistance for the RUT.
The pattern of sustained daily closes beneath about 1,137 and mostly at or below 1,127, however, is beginning to look worrisome. That pattern keeps alive the possibility of a potential retest of last week's and even February's lows. Currently, the Keltner setup suggests that there may be support on daily closes at about 1,090-1,105. The 1,090-1,095 zone, in particular, is an important one. It includes a 10-percent drop off the RUT's 1,212.82 high as well as important Keltner support that has held up on most daily closes for more than a year. Breaking that 1,090 support on sustained daily closes, breaks a long-term pattern for the RUT. In addition, we can't ignore the potential head-and-shoulders formation, even though the RUT's version has a truncated second shoulder and a debatable neckline area. Some will be looking at a neckline confirmation level as high as 1,100 and others, as low as 1,080.
The RUT may be the index to watch, then, for guidance. A sustained break up through about 1,160 would certainly surprise shorts, although more may be ready and willing to short RUT component stocks at RUT 1,800. Likewise, buyers of RUT component stocks may be ready to throw in the towel if values below 1,080 or maybe even below 1,090 are sustained.
Annotated Daily Chart of the Dow Jones Transports:
The DJT, the Dow Jones Transports, serves as a bellwether indicator for the economy. So far, it, too, maintains most daily closes above a rising 9-ema. The DJT recently broke out to a new high, but it couldn't maintain that breakout. It should be watched closely, too. New upside breakouts that are sustained would likely encourage SPX, OEX and Dow bulls, at least, while a breakdown in the DJT might further discourage those traders who have been dumping the less liquid small caps or those sitting on big gains in the high momentum stocks.
Tomorrow's Economic and Earnings Releases
This week's important economic events are carried forward from Jim Brown's weekend Wrap.
Japan's Nikkei 225 will not be open tonight. Other events of note that might impact trading tomorrow include a raft of Service (or Non-Manufacturing) PMI's across Europe, as well as ongoing ECOFIN Meetings. The ECOFIN meetings among European Council member countries' finance ministers. This is termed the broadest financial decision-making body in Europe.
Companies reporting earnings tomorrow include ALL, CBOE, DIS, EA, FSLR, NUS, TM, UBS and WFM.
What about Tomorrow?
Annotated 30-Minute Chart of the SPX:
This 30-minute chart displays the way the SPX has been chopping through the purple Keltner channel, beginning to flatten that channel. Strength has been waning. Although most 30-minute closes have been above the red 9-ema, the movements threaten to flatten that moving average, too, rendering it less venerable of a benchmark for measuring short-term bullish or bearish action. For now, sustained closes above the 9-ema suggest it's more likely for the SPX to reach toward its next upside Keltner target, now at about 1,889-1,894, than it is to fall, but I would take that guidance with a grain of salt due to the flattening channel. Sustained 30-minute closes below about 1,879 would suggest that the SPX is more likely to drop toward its nearest short-term downside target, from about 1,870-1,880. The channels have flattened enough that movements within the purple channel may not be anything more than chop and not particularly predictive of next medium-term direction.
What if the SPX does break out of the purple channel? Sustained 30-minute closes above about 1,894 target the 1,900-1,905 zone. Sustained 30-minute closes below about 1,870 target the 1,845-1,851 zone.
Annotated 30-Minute Chart of the Dow:
The Dow has also flattened out its purple channel, indicating a temporary waning of upward momentum, perhaps ahead of the Yellen testimony later this week. Today, potential support on 30-minute closes from about 16,483-16,520 held throughout the afternoon. As long as that support continues to hold on 30-minute closes, the Dow may be more likely to reach for its next potential upside target, now ranging from about 16,590-16,623. Sustained 30-minute closes beneath about 16,483, however, may target the 16,400-16,430 zone, where support may be found on 30-minute closes. As was true with the SPX, it may be now that movements within the purple channel are just chop, not being particularly predictive of next direction.
Sustained 30-minute breakouts above or below the purple channel--so above about 16,623 or below about 16,400--set up new targets. The next potential upside target in case of an upside break would be about 16,700-16,731. The next potential downside target in case of sustained 30-minute closes beneath about 16,400 would be about 16,238-16,270. We can see from the chart, however, that there may also be some historical support just above 16,300.
Annotated 30-Minute Chart of the NDX:
The NDX has also flattened its purple channel, and it's also been chopping back and forth across its 9-ema. The potential support on 30-minute closes at the 9-ema has to be broadened to include the peach-colored 45-ema. With the exception of this morning's first thirty minutes, the NDX has maintained 30-minute closes above that 45-ema's support since last Tuesday. As long as the NDX maintains those 30-minute closes above about 3,588-3,598, it maintains the possible upside target at about 3,610-3,622. An upside breakout characterized by sustained 30-minute closes above about 3,622 would set a next potential Keltner target at about 3,646-3,658.
What if the NDX weakens? Sustained 30-minute closes below about 3,588 would set a potential downside short-term target at 3,557-3,575. A failure to maintain 30-minute closes above about 3,557 would set a downside target at about 3,485-3,500.
Annotated 30-Minute Chart of the Russell 2000:
The RUT again shows its relative weakness when its Keltner chart is compared to that of the other indices. The RUT has flattened its purple channel. In addition, many of today's 30-minute closes were beneath the red 9-ema and within the potential support/resistance zone that contains the converging 9- and 45-ema's. That zone ranges from about 1,124-1,129. Sustained 30-minute closes beneath about 1,124 would set a potential short-term downside target of about 1,112-1,116. The RUT hit that zone soon after the open today and bounced from it, but then the RUT couldn't sustain values in the upper or bullish half of the purple channel. To do so, the RUT would have to sustain 30-minute closes above about 1,129, setting a potential upside target of about 1,135-1,140.
As was true with the other indices, prices that chop around within that flattened purple channel may no longer indicate much to us about next direction and may just validate that there's chop. However, if the RUT were to sustain 30-minute closes above about 1,140 or below about 1,112, it would be breaking out of that purple channel. Either breakout would set a next potential short-term target, at about 1,154-1,160 on the event of an upside breakout or at about 1,098-1,102 on the event of a downside breakdown.
What's next? Today's light volume, the underperformance of the RUT, the financials and the transports, and the way the market gains were made all combined to recommend a little skepticism about the day's gains. Many indices traded sideways after the bounce off the morning low. The late-day push higher felt a little as if shorts finally gave up the hope that prices would roll over by the end of the day and chose to cover some of their shorts. While it was impressive that equity markets here (and also some in Asia and Europe) bounced off their lows, we need to see some follow through before we believe too strongly in renewed strength. I'm just not certain we'll get it before the FOMC chair's testimony on Wednesday. That depends on whether bulls or bears are running scared.
We can't deny that some indices have reinstituted their rally patterns, but you kind of have to do a little side-to-side hand wave when saying that. None of those indices are bounding higher from their retests of their 9-emas, and other indices aren't even managing that much strength. Treat the upcoming hearings beginning on Wednesday as you would an upcoming FOMC meeting when you didn't know what might be decided. Don't go into that meeting with too much risk in your options trades. If it's time to start a new trade, you might consider waiting until the Q and A session has concluded on Wednesday, at least, before opening that position. If not, you might want to open it in a smaller size than normal.