10/11/2011 11:10:43 AM

Columbus Day light trading volume sees the bears in hiding...

Recommendation:
Take no action.

Click here to access our stock market chat rooms today! For a limited time, try our chat room for free. No subscription necessary to give it a try.

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):
Long DIA at $107.72
Long QQQ at $52.07
Long SPY at $112.34

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

Value Portfolio:

Daily Trading Action

The major index ETFs opened more than one percent higher and then rallied yet higher until around 11:00am. From there, it was sideways trading for most of the session with a move lower commencing around 2:30pm EDT. That move lasted for an hour then the bulls took control and drove the major indexes solidly higher into the close finishing at the day's highs. This left all three major indexes above both their 20-Day and 50-Day Moving Averages (DMAs). In fact, all equity indexes we regularly monitor finished above these important moving averages with the exception of the Bank Index, which finished above its 20-DMA but below its 50-DMA. The Dow Jones Transport Index (IYT 81.09 +2.94) rose +3.8%. The Russell-2000 (IWM 68.37 +2.87) gained +4.4%. The semiconductor Index (SOX 366.79 +10.06) rose +2.8%. The Bank Index (KBE 18.61 +0.91) rose +5.1%. The Regional Bank Index (KRE 21.04 +1.11) soared +5.6%. The Finance Sector ETF (XLF 12.44 +0.61) jumped +5.2%. Long term bonds (TLT 116.57 -1.67) fell -1.4% and broke below its 20-DMA. It is in a trading state. The BIAS of all equity indexes we regularly monitor is BEARISH but all have warned of a potential move to a BULLISH BIAS. The BIAS of longer term bonds is BULLISH but has warned of a potential move to a BEARISH BIAS.

There were no economic reports released. The focus was on bank recapitalization plans for European banks and non-related capitalization of the largest four banks in China. This translates to less risk globally in the banking systems. This left the U.S. dollar to plummet as the need for a safe haven currency lessened. The U.S. dollar fell a whopping -1.6% (from Friday's close) marking one of the largest moves of the year.

The yield for the 10-year note rose a single basis point to close at 2.08. The price of the near term futures contract for a barrel of crude oil rose $2.43 to close at $85.41.

Implied volatility for the S&P-500 (VIX 33.02 -3.18) fell nine percent. The implied volatility for the NASDAQ-100 (VXN 34.48 -2.60) fell seven percent.

Market internals were positive with advancers leading decliners 7:1 on the NYSE and by 5:1 on the NASDAQ. Up volume led down volume 7:1 on the NYSE and by 8:1 on the NASDAQ. The index put/call ratio rose +0.28 to close at 1.79. The equity put/call ratio fell -0.06 to close at 0.63.

Commentary:

Monday saw typical Columbus Day light trading volume. The large gap up open was followed by solid buying and little effort put out by the bears to contain the bulls. This sets the market up for a pull-back on Tuesday and the question remains whether anything significant will come from the pull-back.

We are mindful that the move was helped by the fall in the U.S. dollar. In looking at the move in the dollar and the corresponding move higher for the Euro versus the U.S. dollar (FXE), we see that a potential reversal was signaled that we need to be mindful of. There is a pattern in reading Japanese candlesticks known as the abandoned baby. It is not a typical pattern but is a strong reversal signal when it is seen. Tuesday's trading will confirm whether this pattern will emerge. If so, the dollar is likely to head higher and our long equity positions will be threatened.

Of course, all of this is conjecture at this time and we will sit on our hands and do nothing until we see how U.S. markets trade on Tuesday. We saw light trading volume, which always makes us nervous but there is no indication in the equities that this move has been completed yet so stay tuned.

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