12/8/2011 8:52:44 AM

A big sell-off, recovery, move to new highs, and fall back....

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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.

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Daily Trading Action

The major indexes opened lower and immediately the bottom dropped out and the marjor indexes plummeted for the first fifteen minutes of trading. They recovered for the next half hour before the next bout of selling took them back down to retest the early morning low. For the Dow and NASDAQ-100, that low held as support while the S&P-500 made a new lower low. That level would never be challenged again as the bulls stepped in and began to buy in earnest with an upward move that would last through the lunch hour. The pull-back that followed was shallow and lasted until the final hour of trading when buy programs hit and the major indexes leapt to new intraday highs. The final five minutes saw heavy selling to force the NASDAQ-100 to close flat and took some of the gains off the Dow and S&P-500. Still, both the Dow and S&P-500 closed with fractional gains and the latter moved back above its 200-Day Moving Average (DMA). The semiconductor index (SOX 381.85 +4.44) gained more than one percent to lead the move higher. As we suggested, the Russell 2000 (IWM 74.68 -0.15) would notch a loss, albeit a small one. The Dow Jones Transport Index (IYT 89.14 +0.06) rose modestly. The Bank index (KBE 19.69 +0.17) tacked on a fractional gain as did the Regional Bank Index (KRE 23.92 +0.10). The Finance Sector ETF (XLF 13.34 +0.16) added more than one percent. The Dow, Semiconductor Index, and Dow Jones Transport Index are in uptrend states with the other equity indexes we regularly monitor in trading states. Equity indexes that we regularly monitor currently have a BEARISH BIAS with the exception of the Regional Bank Index and the Dow Jones Transport Index but all have warned of a shift to a BULLISH BIAS. Long term bonds (TLT 117.69 +0.42) recovered modestly as many market participants are still looking for a degree of safety. TLT remains below its 20-DMA, is in a trading state and retains its BULLISH BIAS but is leaning toward a shift to a BEARISH BIAS. Trading volume was light 968M shares traded on the NYSE and with 1.490B shares traded on the NASDAQ.

There were two economic reports released:

• MBA Mortgage Index for last week rose 12.8% versus the prior week's -11.7% reading
• Consumer Credit (Oct) rose +$7.6B versus an expected +$7.0B

The first report was released 2.5 hours before the open while the last report was released with an hour remaining in the session.

The U.S. dollar fell just over one tenth of one percent.

Energy -0.3%, Utilities -0.3%, and Industrials -0.2% moved lower but the other seven economic +1.2% leading the charge. The influential Tech sector rose just +0.1% as did Consumer Staples and Materials.

The yield for the 10-year note fell seven basis points to close at 2.02. The price of the near term futures contract for a barrel of crude oil fell seventy-nine cents to close at $100.49. The weekly U.S. government reported that crude oil inventories had risen by 1.336M barrels.

Implied volatility for the S&P-500 (VIX 28.67 +0.54) rose nearly two percent as did the implied volatility for the NASDAQ-100 (VXN 28.45 +0.51).

Market internals were mixed with advancers edging decliners 9:8 on the NYSE while decliners led advancers 7:8. Up volume led down volume 3:2 on the NYSE while down volume edged up volume on the NASDAQ. The index put/call ratio rose 0.11 to 0.92. The equity put/call ratio fell -0.02 to close at 0.74.

Conclusion/Commentary

Wednesday saw futures drop before the market opened and the bottom fell out of the market in the early going. Then, just when it seemed all was lost the bulls began buying. The bears took another shot but failed and the market rallied nicely the remainder of the session. The final five minutes of trading looked more like someone wanted to force the NASDAQ-100 to close flat and the other major indexes were moved down with it. This positions all the major indexes for a second consecutive session, something that hasn't happened since the late October top. This sets up high drama between bulls and bears and the potential for a large move to get started.

On the flip side, this sets up the move lower we have been anticipating as the markets could easily reach overbought levels shortly which would set up greater potential for a nastier move lower. In other words, a pull back would be healthier than the lack of one.

We are going to sit on our hands and see which scenario plays out on Thursday as the European Union begins a summit on Thursday with the intent to, once again, come up with an agreement that will improve the stability of the Euro and help to resolve the significant overhang of many European countries severe debt loads at current interest rates. In conjunction with that, the European central bank is expected to reduce their key interest rate by 25 basis points. Stay tuned for a potential change of positions as we monitor market action.

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