9/29/2010 9:12:42 AM

The day started off with a scary slide but ended with the Dow and S&P-500 making up the ground they lost on Monday...

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:
Short DIA at $108.57
Short QQQQ at $49.66
Short SPY at $114.82
We are long Oct $106 DIA puts at $185 per contract ($1.85 per share) on Friday, Sept 17th.
We are long Oct $48 QQQQ puts at $94 per contract ($0.94 per share) on Friday, Sept 17th.
We are long Oct $113 SPY puts at $231 per contract ($2.31 per share) on Friday, Sept 17th.

Daily Trading Action

The major index ETFs opened modestly higher and immediately dove lower stabilizing after fifteen minutes. The sell-off was on heavy volume. Another fifteen minutes later on the release of a disappointing economic report, the major indexes accelerated downward, again on heavy volume, but that move was also over in fifteen minutes and within another fifteen minutes the major indexes had retraced the amount the fell from 10:00am. From that point, it was a gradual struggle to move back up to positive territory and then to attempt to break through recent highs. The major indexes fell just short of that but the Dow and S&P-500 closed made up most of the territory they lost on Monday. The NASDAQ-100 closed relatively flat. The Russell-2000 (IWM 67.48 +0.66) rose one percent while the Semiconductor Index (SOX 349.46 +5.66) rose 1.6%. The Bank Index (KBE 22.99 +0.08) rose fractionally while the Regional Bank Index (KRE 22.80 +0.28) gained more than one percent. The 20+ Yr Bonds (TLT 106.02 +0.72) continues to rise defying the normal inverse relationship it has with equities. NYSE volume was on the low end of average with 1.026B shares traded. NASDAQ volume increased slightly but was still average with 2.113B shares traded.

There were two economic reports of interest released:

• Case-Shiller 20-City Index (Jul) rose +3.18% versus an expected +3.3%
• Consumer Confidence (Sep) came in at 48.5 versus an expected 53.0

The first report was released a half hour before the open while the latter report came out a half hour into the session.

Nine out of ten economic sectors in the S&P-500 moved higher led by Healthcare (+0.9%). The Materials sector was unchanged.

Implied volatility for the S&P-500 (VIX 22.60 +0.06) rose fractionally as did implied volatility for the NASDAQ-100 (VXN 23.86 +0.22). Both are still below their 200-DMAs.

The yield for the 10-year note fell four basis points to close at 2.48. The price of the near term futures contract for a barrel of crude oil fell thrity-four cents to close at $76.18.

Market internals were positive with advancers leading decliners 2:1 on both the NYSE and the NASDAQ. Up volume led down volume 3:1 on the NYSE and by 3:2 on the NASDAQ. The index put/call ratio rose 0.51 to close at 1.87. The equity put/call ratio was nearly unchanged ticking up 0.02 to close at 0.60.

Commentary:

Tuesday's trading saw the Dow and S&P-500 make up most of the ground they had lost on Monday. The NASDAQ-100 didn't make up any lost ground but finished relatively flat. U.S. equity markets are at a critical point where they will either find a catalyst to move higher or roll over and collapse of their own weight. The Dow closed within two points of its close on Friday. The S&P-500 closed was just more than one point below its close last Friday. With the index put/call ratio rising up more than fifty basis points in a single day, many traders have taken out insurance in case of a fall.

We continue to be patient as we wait to see how this impasse will be broken. We are positioned for downside action. One reason for this is that we see similarities between current market action and that seen at the last top in late April. Coincidentally, the levels of the major indexes are very similar now as they were then. Recall that history doesn't tend to repeat itself, but sometimes it rhymes. Hang tough and we will wait to see which direction things break, hopefully with some momentum developing soon.

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