9/16/2010 9:14:25 AM

The June 21st high horizontal resistance halted the advance of the major indexes...

Recommendation:
Take no action.

Daily Trend Indications:

- Positions indicated as Green are Long positions and those indicated as Red are short positions.

- The State of the Market is used to determine how you should trade. A trending market can ignore support and resistance levels and maintain its direction longer than most traders think it will.

- The BIAS is used to determine how aggressive or defensive you should be with a position. If the BIAS is Bullish but the market is in a Trading state, you might enter a short trade to take advantage of a reversal off of resistance. The BIAS tells you to exit that trade on "weaker" signals than you might otherwise trade on as the market is predisposed to move in the direction of BIAS.

- At Risk is generally neutral represented by "-". When it is "Bullish" or "Bearish" it warns of a potential change in the BIAS.

- The Moving Averages are noted as they are important signposts used by the Chartists community in determining the relative health of the markets.

Current ETF positions are:
Long at DIA $102.80
Long QQQQ at $44.76

Daily Trading Action

The major index ETFs opened lower and immediately headed lower but that move lasted only about fifteen minutes before the bulls took control and marched the major indexes steadily higher. In fact, the major indexes moved into positive territory after a little more than the first half hour had expired. The bears were able to mount a counter attack around 2:00pm but that lasted less than an hour and wasn't a very large move. The major indexes closed near their highs with a sell-off in the final half hour that saw a surge in the final minute of trading. The Russell-2000 (IWM 65.36 +0.37) posted a fractional gain. The Semiconductor Index (SOX 331.64 -1.12) gave up a fraction of one percent after adding five percent in the previous two sessions. The Bank Index (KBE 23.56 +0.00) treaded water and the Regional Bank Index (KRE 22.69 +0.04) added a very modest gain. The 20+ Yr Bonds (TLT 102.27 -1.54) lost another one and a half percent without the Fed's open market operations propping it up. That action is expected to prop up bonds once again today.. NYSE volume was below average 890M shares traded. NASDAQ volume was above average with 2.043B shares traded. Both exchanges saw slightly less volume than on Tuesday.

In addition to the weekly crude oil inventory report, there were five economic reports of interest released:

• NY Fed Empire MFG Index (Sep) came in at 4.1 versus an expected 6.4
• Export Prices excluding Agriculture (Aug) rose +0.5% versus falling -0.2% in July
• Import Prices excluding Oil (Aug) rose +0.3% versus falling -0.2% in July
• Industrial Production (Aug) rose 0.2% versus an expected +0.3% rise
• Capacity Utilization (Aug) came in at 74.7% versus an expected 75%

The first three reports were released an hour before the open. The other two reports were released fifteen minutes prior to the opening bell. Overall, the reports were fairly close to expectations with the exception of the Empire Manufacturing Index, which shows that growth, while still positive is more tepid than expected.

The day was all about the major indexes moving up to and closing at horizontal resistance levels. The bulls staked out their claim and challenged the bears to stop the advance. The battle line is clear.

Seven out of the ten economic sectors in the S&P-500 posted gains led by Healthcare (+0.8%), Consumer Staples (+0.7%), and Tech (+0.6%). Utilities (-0.5%), Energy (-0,.2%), and Materials (-0.1%) were the losing sectors.

Implied volatility for the S&P-500 (VIX 22.10 +0.56) rose two and one half percent and implied volatility for the NASDAQ-100 (VXN 22.15 +0.52) rose a similar amount.

The yield for the 10-year note rose six basis points to close at 2.72. The price of the near term futures contract for a barrel of crude oil fell seventy-eight cents to close at $76.02. This actually follows the weekly U.S. government report that crude oil inventories experienced a draw down of -2.49M barrels in the last week.

Market internals were positive with advancers leading decliners 23:20 on the NYSE and by 4:3 on the NASDAQ. Up volume led down volume by 3:2 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose 0.04 to close at 1.37. The equity put/call ratio fell 0.06 to close at 0.55.

Commentary:

Wednesday's trading continued the bullish assault on horizontal resistance. With the major indexes all closing at horizontal resistance that dates back to the intraday high on June 21st, the battle line has been clearly drawn. For the S&P-500, that is the level that marked a double top (June 21 and August 9th). Is this going to be a triple top or will the markets surge higher? That is the big question that traders are asking right now and the area we identified as the focus for the markets right now. These levels are:

All three major indexes joined the Russell-2000 in uptrend states and the bias of all four indexes moved to neutral heading toward bullish. Don't underestimate the meaning of this. While the bears may be successful in thwarting the bulls in moving the market higher at this point, the underlying uptrend states make it likely that the bulls will persevere here. While it is never a certainty, we believe the bulls are currently still favored, even though the major indexes have reached overbought conditions. One thing that is nagging at this time is the lack of participation of semiconductors. However, if there is active buying interest on heavy volume in semiconductors, I believe that would confirm the strength for a new advance.

Volume was dialed back a bit on Wednesday and the closing values for the major indexes look to have been manufactured through program trading. A volume surge that accompanies a move higher or a reversal will provide more credence to any move takes place. We will hold onto our long positions until we see the bulls lose their edge.

We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.