Bull Trap...
12/8/2010 9:18:10 AM
The major indexes gapped up to open above key resistance levels but gave up those gains as the session wore on...
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 significantly higher and began to immediately lower from the open. The move lower lost steam after a bit more than an hour but didn't find a bottom until the noon hour when prices began to march steadily higher. That march higher ended abruptly with a free-fall that began about ten minutes before 3:00pm lower that took the major indexes from near their open prices to lower than their intraday lows in a matter of ten minutes. From that point, the major indexes continued to lose ground until all of them had seen the gap up open collapse completely and all the major indexes finished relatively unchanged in price with the Dow actually recording a slight loss and the other two indexes slight gains. All the major indexes are in uptrend states. The Russell-2000 (IWM 76.58 +0.44) tacked on a fractional gain as it continues to move higher as the risk trade is on. The Semiconductor Index (SOX 411.51 -0.26) posted a small loss closing nearly where it opened. The Bank Index (KBE 23.79 +0.01) and the Regional Bank Index (KRE 24.17 -0.01) closed essentially unchanged. The Regional Bank Index opened at its 200- Day Moving Averages (DMA) and moved steadily lower while the Bank Index never quite reached its 200-DMA. The 20+ Yr Bonds (TLT 94.17 -2.06) collapsed more than two percent reaching a new intraday low but closing above its closing low in early/mid November. NYSE volume doubled to a heavy 1.626B shares traded. NASDAQ volume was average with 1.905B shares traded.
There was a single economic report of interest released:
- Consumer Credit (Oct) rebounded to +$3.4B versus an expected collapse of -$2.5B
The report was released at 3:00pm EST.
The bid news of the day was that Congressional leaders met with President Obama and agreed to extend the Bush-era tax cuts to all taxpayers as well as cut payroll taxes. This will stimulate the economy and help to improve employment. It will also add a trillion dollars to the U.S. deficit over a couple of years. This will serve to raise the risk for U.S. treasuries requiring higher interest payments/lower bond prices to compensate fixed income investors. It should also result in a better environment for company profits leading to higher stock prices hence the gap up open for equities.
The U.S. dollar opened down -0.6% but closed up +0.3%. Equities moved inverse to the dollar.
Industrials (+0.5%), Consumer Staples (+0.4%), Telecom (+0.4%) and Materials (+0.1%) moved higher on the session while Utilities (0.5%) and Energy (-0.3%) moved lower. The remaining four economic sectors of the S&P-500 were unchanged.
Implied volatility for the S&P-500 (VIX 17.99 -0.03) was essentially unchanged and the implied volatility for the NASDAQ-100 (VXN 20.16 +0.25) rose more than one percent.
The yield for the 10-year note rose a whopping 22.5 basis points to close at 3.165! The price of the near term futures contract for a barrel of crude oil fell sixty-nine cents to close at $88.69.
Market internals were mixed with decliners edging advancers on the NYSE while advancers led decliners 5:4 on the NASDAQ. Up volume led down volume nearly 2:1 on the NYSE while down volume led up volume by about one percent on the NASDAQ. The index put/call ratio rose 0.12 to close at 1.23. The equity put/call ratio fell 0.02 to close at 0.47. The level of complacency remains extreme.
Commentary:
Tuesday's trading saw some of the bullish optimism get swatted down as the expectation for the continuation off the Bush-era tax cuts was already baked into stock prices. The addition of the payroll tax cuts was new, however, but was apparently discounted by the time the markets closed. We would expect a couple of days of stock market rallies before a potentially larger sell off. On the other hand, we could see a rally get started if we get a pull back in short order. At this time we aren't certain which direction the market will take but with all the major indexes in uptrend states, it wouldn't be prudent to take a short position just yet. We will remain in cash for yet another day.
We hope you have enjoyed this edition of the McMillan portfolio. You may send comments to mark@stockbarometer.com.
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Author: Mark McMillan
Mark McMillan
The McMillan Portfolio
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