9/17/2010 9:07:48 AM

The bears attack and are beaten back with the NASDAQ-100 breaking above horizontal resistance...

Recommendation:
Buy Oct $106 DIA puts to cover your long positions at ten cents below the opening ask price. For instance, if the opening ask price is $2.00, place an order to buy at $1.90.
Buy Oct $48 puts to cover your long positions at a five cents below the opening ask price. For instance, if the opening ask price is $0.95, place an order to buy at $0.90.
Buy Oct $113 SPY puts at ten cents below the opening ask price. For instance, if the opening ask price is $2.30, place an order to buy at $2.20.

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 to move them higher but the major indexes had a problem moving into positive territory and rolled over by late morning heading into a bottom shortly after noon. The rally that began during the lunch hour was thwarted and the bulls waiting until shortly before 2:00pm to once again assert themselves and this time were successful in breaking the hold of the bears. The NASDAQ-100 finished with gains of a bit under one half of one percent and the Dow notched a gain of about a quarter of one percent while the S&P-500 finshed a few one hundredths of one percent below Wednesday's close with some weakness in the final half hour leading to a negative close. All three major indexes moved now share a BULLISH BIAS and are in uptrend states. The Russell-2000 (IWM 64.94 -0.42) actually lost ground and was down more than one percent intraday. It is also in an uptrend state with a NEUTRAL BIAS. The Semiconductor Index (SOX 334.24 +2.60) was the big winner in terms of notching gains for the day. It is still in a trading state with a BEARISH BIAS. The Bank Index (KBE 23.42 -0.14) lost about one half of one percent and the Regional Bank Index (KRE 22.43 -0.26) lost more than one percent on the day. Both bank indexes remain in trading states with BEARISH BIAS. The 20+ Yr Bonds (TLT 101.26 -1.01) lost another one percent under heavy selling pressure. NYSE volume was light with 812M shares traded. NASDAQ volume was below average with 1.786B shares traded.

There were seven economic reports of interest released:

• Initial Jobless Claims for last week came in at 450K versus an expected 460K
• Continuing Jobless Claims came in at 4.485M versus an expected 4.450M
• PPI (Aug) rose +0.4% versus an expected +0.3% rise
• Core PPI (Aug) rose +0.1% as expected
• Current Account Deficit (Q2) came in at -$123.3B versus an expected -$125.0B
• Net Long-term TIC Flows (Jun) saw inflows to U.S. of $61.2B
• Philadelphia Fed (Sep) came in at -0.7 versus an expected +2.0

The first six reports were released a half hour to an hour before the open. The final report was released a half hour into the session. On deck for Friday are the CPI and Core CPI reports (pre-open) and UofMichigan Consumer Sentiment twenty-five minutes after the open.

The bears came out swinging but lacked conviction to get the job done. With the S&P-500 basically flat and with the Dow and NASDAQ posting gains, the day went to the bulls. However, with the Bank Indexes and Russell-2000 showing weakness, all wasn't warm and fuzzy. Contradicting that weakness was a rally in the semiconductors. Which was is did the market go?

Tech (+0.7%), Materials (+0.4%), and Telecom (+0.2%) moved higher on the day while six out of the ten economic sectors in the S&P-500 posted losses. Consumer Staples were unchanged.

Implied volatility for the S&P-500 (VIX 21.72 -0.38) declined modestly as did implied volatility for the NASDAQ-100 (VXN 21.81 -0.34).

The yield for the 10-year note rose four basis points to close at 2.76. The price of the near term futures contract for a barrel of crude oil fell $1.45 to close at $74.57.

Market internals were mixed with decliners leading advancers 7:5 on the NYSE and by 5:3 on the NASDAQ. Up volume led down volume by a two percent on the NYSE and by 5:4 on the NASDAQ. The index put/call ratio fell 0.32 to close at 1.05. The equity put/call ratio rose 0.03 to close at 0.58.

Commentary:

Thursday's trading saw the bears slow the bullish assault but were basically unable to contain it. The NASDAQ-100 broke above the horizontal resistance level and the Dow is just above that level but not definitively breaking out. The S&P-500 actually had a fractional loss but is basically where it left off on Wednesday. Is this going to be a triple top for the S&P-500 or will the markets surge higher? The levels we are monitoring are:

Often the most frustrating thing in trading is to be patient. I have been looking for topping action and caught a glimpse of it at the close but really only on QQQQ and sort of on SPY with a unique indicator I developed. With all the major indexes in uptrend states and now sharing a BULLISH BIAS, however, the intermediate term pressure is still to the upside. I have been waiting for the participation of the semiconductors to signal that the leading indicators are in sync heading higher and then we get bearish action on the Russell-2000 and the bank indexes.

Friday is quarterly options expiration known as quadruple witching. This usually sees unusually high trading volumes as many contracts expire and traders continue to square their positions. I am concerned that we could see topping action soon but we will hold onto our long positions until we see something more definitive. As a precaution, however, we will look to buy puts to insure against a top.

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