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Gains Muted at Resistance...

1/18/2012 8:57:09 AM

A gap up open declined into modest gains by the close...

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Stock Market Trends:

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 higher and moved a bit higher in the first fifteen minutes before peaking before the top of the hour and finding a bottom within a half hour. There was a gradual rise through the rest of the morning before peaking in the first half of the lunch hour that turned into a sell-off the rest of the afternoon. This left the Dow and S&P-500 with fractional gains while the NASDAQ-100 was able to close where it opened, which was up one percent. The Dow and S&P-500 are now in trading states while the NASDAQ-100 was able to maintain its uptrend state. The semiconductor index (SOX 385.22 +1.75) added a fractional gain closing just below its 200-Day Moving Average (DMA). The Russell 2000 (IWM 76.36 -0.03) closed relatively flat while the Dow Jones Transport Index (IYT 92.06 -0.18) posted a modest loss. The Bank index (KBE 21.37 -0.19) lost nearly one percent and the Regional Bank Index (KRE 26.10 -0.12) posted a fractional loss. The Finance Sector ETF (XLF 13.71 -0.11) posted a large fractional loss as well. Only XLF and SOX closed below their respective 200-DMAs. All equity indexes have a BULLISH BIAS. Long term bonds (TLT 121.44 +0.56) posted a fractional gain. It is trading above all three moving averages we regularly report on and is in an uptrend state and retains its BULLISH BIAS. Trading volume was light on the NYSE with 810M shares traded as well as on the NASDAQ with 1.570B shares traded.

There was a single economic report released:

  • Empire Manufacturing Index (Jan) came in at 13.5 versus an expected 10.0

The report was released an hour before the open.

JP Morgan Chase (JPM 34.91 -1.01) led the Dow downward after Citigroup (C 28.22 -2.52) missed on earnings expectations. Wells Fargo Corp (WFC 29.83 +0.22) bucked the trend after beating earnings expectations.

The U.S. dollar fell four tenths of one percent. The Euro rose a like amount.

The yield for the 10-year note was unchanged at 1.85. The price of the near term futures contract for a barrel of crude oil rose $2.01 to close at $100.71.

Implied volatility for the S&P-500 (VIX 22.20 +1.29) rose six percent and the implied volatility for the NASDAQ-100 (VXN 22.21 +0.83) rose most of four percent.

Market internals were positive with advancers leading decliners 5:3 on the NYSE and by 9:8 on the NASDAQ. Up volume led down volume 5:4 on the NYSE and by 3:2 on the NASDAQ. The index put/call ratio rose 0.37 to close at 1.21. The equity put/call ratio fell -0.02 to close at 0.59.


Tuesday's market action revealed how determined some market bears are. The key resistance level for the S&P-500 dating back to the July 18th low was overcome at the open but with the continued sell-off through the session, price closed back just below this key level. The fight to push the index back above this level or to thwart those plans will be joined again on Wednesday and it is still the key level to watch. That level is around 1,296 with Tuesday's close being just below 1,294 having reached the 1,303 level in the early going.

This is a battle between Greed and Fear. The bulls don't want to miss out on a potential P/E ratio expansion due to a better than expected U.S. economy. The bears don't want to get caught in an economic apocalypse if European sovereign debt blows up and causes the global economy to drop into a recession.

With all the equity indexes we follow still above their 200-DMAs (with the Semiconductor Index and Finance Sector noted as the sole exception), equity investors seem content to ride a wave higher. At the same time, bond investors also have maintained the longer-term bonds at a price point above its 200-DMA as well. We want to give the bulls and bears time to resolve their battle as the outcome is still far from certain. The finance sector took the worst hit on Tuesday dragging down the Dow and S&P-500.

While we are still looking for a top, we don't have a definitive top put in yet. Certainly there are some chinks in the bullish armor after the gap up higher couldn't hold onto those gains. Still, we are right at a key resistance level and if the bulls are able to force a close decidedly above that level, we believe that the U.S. equities can continue to fight higher. Much of that will follow from whether the bullish move for longer term bond prices will end here and produce a liquidity sell-off that will flow into equities sending the major indexes higher. We will give the market another day to let the bulls and bears bloody each other and provide us a better idea of which side will win out in the short term.

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


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