11/10/2010 8:59:44 AM

The dollar has risen +2.8% since it bottomed last week...

Recommendation:
Buy shares of DIA to close the short position at a limit of $112.40.
Buy shares of QQQQ to close the short position at a limit of $53.05.
Buy shares of SPY to close the short position at a limit of $120.05.

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

Daily Trading Action

The major index ETFs opened higher and the immediately sold-off those gains to move into negative territory in the first half hour of trading before bouncing higher for the next half hour of trading in conjunction with a better than expected economic report. The remainder of the session was spent see-sawing lower with lower lows and lower highs progressively through the session. If not for a rally in the final fifteen minutes of trading, the major indexes were set to finish down about one percent. The Semiconductor Index (SOX 387.32 -4.56) lost more than one percent and the Russell-2000 (IWM 72.73 -0.98) was down two percent near the close but rallied back in the final fifteen minutes to finish down only one and one third of one percent. The bank indexes closed lower retreating from their 200-Day Moving Averages (DMAs) with the Bank Index (KBE 23.63 -0.42) lost nearly two percent and the Regional Bank Index (KRE 23.49 -0.31) fell about one and one half of one percent. The 20+ Yr Bonds (TLT 96.25 -2.17) sold off more than two percent and broke down through its 200-Day Moving Average (DMA). NYSE volume was average with 1.110B shares traded. NASDAQ volume was average with 2.162B shares traded.

There was a single economic report of interest released:

• Wholesale inventories (Sep) rose +1.5% versus an expected rise of +0.6%

This report was released a half hour into the session and is generally ignored by traders in favor of a full inventory report due out later in the week.

The U.S. dollar traded higher on the day reversing a fall in the first half hour of the equities trading session. That marks the third day of significant gains for the dollar with a +0.9% gain recorded for Tuesday which left the dollar up +2.8% from the intraday low last week.

The effects of QE2 are being seen in investor appetite for bonds as an auction of the 10-year bond essentially failed causing a drop in the price of those bonds and a rise in the yield of nine basis points. This contributed to the more than two percent fall in the price of the 30-year bonds. Recall that the Fed is going to purchase some $900B in bonds averaging five to six years in length. Those purchased will be over an eight month period. The Fed wants to drive yields in the opposite direction than are being seen by market forces as the Fed is causing a crisis in confidence.

Financials (-2.2%) led the way lower as all ten sectors in the S&P-500 moved lower on the day.

Implied volatility for the S&P-500 (VIX 19.08 +0.79) rose four percent while the implied volatility for the NASDAQ-100 (VXN 18.99 +0.29) rose a more modest one and one half of one percent.

The yield for the 10-year note rose three basis points to close at 2.60. The price of the near term futures contract for a barrel of crude oil fell thrity-four cents to close at $86.72.

Market internals were negative with decliners leading advancers nearly 3:1 on the NYSE and by 5:2 on the NASDAQ. Down volume led up volume 4:1 on the NYSE and by 2:1 on the NASDAQ. The index put/call ratio rose 0.29 to close at 1.34. The equity put/call ratio rose 0.03 to close at 0.57.

Commentary:

Tuesday was all about gains in the U.S. dollar actually causing equities bulls to give up some ground. Volume increased to average accompanying the move lower. This suggests that the move lower has more meaning than that given to a more light volume sell-off.

While equities stumbled somewhat on Monday in the face of the rising dollar, the normal inverse relationship between the dollar and equities can no longer be ignored by equities traders. The bulls have ridden roughshod over equities bears considering it a "fait accompli" that the markets will move higher. While it is too early to suggest that a meaningful reversal is underway, our suggestion that the opening gap from last Thursday would have to be closed is beginning to look more realistic, something equities bulls would have debated much more sharply before Tuesday's trading action.

We continue to look for a move lower to close the gap created by the higher open last Thursday. This would still be within the range that supports a continued uptrend move which we believe is likely here. Based on Tuesday's close, the initial move for equities should be a higher open or immediate move higher which should fail with a downward move to close the gap expected to eventually take place.

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