10/5/2011 9:13:55 AM

The market rises into positive territory in the final fifteen minutes.

Recommendation:
Buy shares of DIA to cove with a limit price of $107.72. Buy shares of DIA to open a long position at the same price.
Buy shares of QQQ to cove with a limit price of $52.19. Buy shares of QQQ to open a long position at the same price.
Buy shares of SPY to cove with a limit price of $112.34. Buy shares of SPY to open a long position at the same price.

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Stock Market Trends:

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

- The State of the stock 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 an ETF position. If the BIAS is Bullish but the stock 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 ETF trade on "weaker" signals than you might otherwise trade on as the stock 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.

Best ETFs to buy now (current positions):
Short DIA at $109.81
Short QQQ at $53.18
Short SPY at $114.45

Click here to learn more about my services and for our ETF Trend Trading.

Value Portfolio:

Daily Trading Action

The major index ETFs opened one percent or more and moved lower for the first half hour of trading before rallying into positive territory and closing the opening gap in late morning. By the lunch hour, the bears were again in charge and the Dow and S&P-500 broke to new 52-week lows while the NASDAQ-100 broke its morning low but remained fractionally above its 52-week low before there was a significant increase in volume as the bulls stepped in to drive the markets straight upward in the final hour of the session. This left all three major indexes closing higher with gains of 1.3% to 2.4% on the day which is a range of more than four percent from intraday low to the closing prices. All equity indexes remain with a bearish BIAS with the exception of the NASDAQ-100 which has a neutral BIAS but looks like it could shift to a bearish BIAS as early as Tuesday. All equity indexes are now in downtrend states. The Dow Jones Transport Index (IYT 75.62 +3.22) gained +4.4%. The Russell-2000 (IWM 64.79 +3.80) gained +6.2%. The semiconductor Index (SOX 340.23 +13.86) gained +4.2%. The Regional Bank Index (KRE 20.06 +1.49) rallied +8.0% and the Bank Index (KBE 17.47 +0.74) rallied +4.4%. The Finance Sector ETF (XLF 11.73 +0.45) gained +4.0%. Long term bonds (TLT 122.24 -1.57) fell a bit more than one percent. It is in an uptrend state. The BIAS of longer term bonds is BULLISH.

There was a single economic report released:

• Factory Orders (Aug) fell -0.2% versus an expected fall of -0.1%.

The report was released a half an hour after the open.

Late in the day, there were reports that officials in the European Union are considering plans to recapitalize banks which corresponded with a massive buying surge that began in the final hour just as NASDAQ-100 looked set to break through its 52-week low.

There is a rumor going back many years that a group known as the Plunge Protection Team (PPT) gets involved in the final hour of trading to create buying pressure to ensure that at key points, the closing prices for the major indexes will hold above key levels. It certainly looks like that was what took place late in the session on Monday. The suspicion is that the large U.S. banks work together to pull this off. Coincidentally, it is rumored that the large U.S. banks bought calls at/near the market lows intraday on Monday before forcing the higher close. The call options are leveraged bets that the market will move higher, ensuring a nice profits to the large banks for weighing in to create buying pressure.

Fed Chairman, Ben Bernanke gave unspectacular testimony saying that the transient inflation seen earlier in the year is abating, the economy is still slow, and that the Fed stands ready to help.

The U.S. dollar fell four tenths of one percent after opening higher and testing even higher intraday. Bank of Japan (BoJ) had announced it would be buying Euros which contributed to pushing the dollar lower. In addition, late in the U.S. session, a announcement to recapitalize European banks was leaked which sent the Euro higher versus the U.S. dollar.

Nine out of ten economic sectors in the S&P-500 moved higher. With Utilities (-0.5%) the only sector to move lower, Financials (+4.1%), Materials (+3.7%), Energy (+3.2%), and Consumer Discretionary (+3.1%) led the markets higher. The defensive sectors gained the least with Telecom (+0.6%), Consumer Staples (+0.7%), and Healthcare (+1.0%) gaining one percent or less.

The yield for the 10-year note fell a single basis point to close at 1.78. The price of the near term futures contract for a barrel of crude oil fell -$1.94 to close at $75.67.

Implied volatility for the S&P-500 (VIX 40.82 -4.63) fell ten percent. The implied volatility for the NASDAQ-100 (VXN 42.47 -4.14) fell nine percent.

Market internals were positive with advancers leading decliners 4:3 on the NYSE and by 8:3 on the NASDAQ. Up volume led down volume 4:1 on the NYSE and by 3:2 on the NASDAQ. The index put/call ratio fell -0.11 to close at 1.52. The equity put/call ratio fell -0.07 to close at 0.78.

Commentary:

Tuesday was all about testing the lows. With the Dow and S&P-500 easily breaking down through their respective lows, the S&P-500 officially reached bear market territory, i.e. down 20% from its high. The real test case, however, remains the NASDAQ-100 which came very close but didn't touch its 52-week low before the late session buying drobe prices higher.

Recapping, even with a bank recapitalization in Europe, Greece is still going to default on its debt. The Europeans may be a step closer to an orderly default but there is certainly going to be a mess to clean up so there will continue to be shocks from that quarter.

There are two sides to the coin in deciding for short term direction where the markets will go. On the one hand, the leading indexes were leading the markets higher and gained the most in the drive higher. The NASDAQ-100 resisted the bear attack and the bulls can consider this a win. On the other hand, the fundamental problems that exist are still around and we think it is likely that they will come back to haunt us.

We will take the middle ground, yielding to the bulls in the short term due to specific patterns observed in the trading action. We believe that the major indexes are likely to be quite volatile on Tuesday and are likely to retrace some of Monday's gains. At the same time, we don't think the bears are ready to force a break down of the NASDAQ-100 yet and we will likely head a bit higher before challenging that level again. Accordingly, we will reverse our positions using a limit price of Monday's closing price to enter long positions. We expect to exit those positions by next week when the bears, once again, have the opportunity to press their attack.

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