12/17/2010 9:04:50 AM

The rally continued with the major indexes posting positive closes but volume backed off as we await topping action...

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:
In cash.

Daily Trading Action

The major index ETFs opened higher and took a trip lower to test important support levels before reversing course a half hour into the session. The move higher would last an hour and a half before sideways action commenced. A break higher began around 12:30pm and lasted for a half hour before all the hot air was let out of the rally and a slow steady decline ensued for most of the remainder of the session. A rally with one hour left woke up traders who had fallen asleep but it didn't move the major indexes back up to their highs and the major indexes closed with fractional gains. The Russell-2000 (IWM 77.78 +0.71) gained nearly one percent while the Semiconductor Index (SOX 408.71 +2.68) was only able to add about two thirds of one percent. It is in a trading state. The Bank Index (KBE 24.59 +0.05) closed modestly above flat and is in a trading state while the Regional Bank Index (KRE 25.15 +0.12) was able to add nearly one half of one percent. The 20+ Yr Bonds (TLT 91.57 +0.63) was able to add a fractional gain as investors moved back into longer term bonds. NYSE volume eased a bit with below average volume of 1.012B shares traded. NASDAQ volume also eased to below average with 1.741B shares traded.

There were six economic reports of interest released:

• Initial Jobless Claims for last week came in at 420K versus an expected 425K
• Continuing Jobless Claims came in at 4.135M versus an expected 4.078M
• Housing Starts (Nov) came in at 555K versus an expected 545K
• Building Permits (Nov) came in at 530K versus an expected 560K
• Current Account Balance (Q3) came in at -$127.2 versus an expected -$125.3B
• Philadelphia Fed (Dec) came in at 24.3 versus an expected 13.0

All the reports were released an hour before the open with the exception of the last one, which came out a half hour after the open.

The U.S. dollar fell about one quarter of one percent on the day which helped power equities to higher closes.

Implied volatility for the S&P-500 (VIX 17.39 -0.55) fell three percent and the implied volatility for the NASDAQ-100 (VXN 18.25 -0.61) fell more than three percent.

The yield for the 10-year note fell four basis points to close at 3.48. The price of the near term futures contract for a barrel of crude oil fell ninety-two cents to close at $87.70.

Market internals were positive with advancers leading decliners 2:1 on both the NYSE and the NASDAQ. Up volume led down volume by 3:1 on both the NYSE and the NASDAQ. The index put/call ratio rose +0.55 to close at 1.38. The equity put/call ratio fell -0.06 to close at 0.49.

Commentary:

Thursday's trading was about head fakes. The major players took the major indexes down to important support levels where they reversed and caught some salivating bears unaware. The shorts had to cover as the bulls took the market higher. However, the overall volume diminished from the previous day. While the bulls can claim a positive finish, the major indexes are sitting just below the significant resistance levels of their recent highs. The Hindenburg Omen failed to appear again so we will be watchful through January for a repeat performance. Without one, we aren't going to get overly concerned of a significant sell-off just yet.

The Dow was able to maintain price above its break-out level so the focus will be on the bulls continuing to push the Dow higher. A failure here would hand things over to the bears and we could finally enter a short trade. We remain in cash as we wait for confirmed topping action.

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