5/24/2011 9:08:49 AM

Euro Sovereign Debt smashed stocks…

The U.S. dollar again moved higher and stocks declined…

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Recommendation:

See call option purchase recommendations at end of alert.

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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):

Long DIA at $125.90

Long SPY at $134.43

Long QQQ at $58.20

Long QQQ June ’11 $57.00 Call options at $0.95 per share

Click here to learn more about my services and for our best ETF portfolios.

Value Portfolio:

We hold no value positions at this time.

Daily Trading Action

The major index ETFs opened significantly lower (more than one percent) and then moved in mixed fashion with the Dow and S&P-500 testing immediately lower in the opening minutes but then moving gradually modestly higher for the first hour of trading.  The NASDAQ-100, on the other hand, moved significantly lower in the first fifteen minutes and would continue to test those depths and move gradually lower for the first hour.  From that point, the Dow and S&P-500 moved lower into the noon hour while the NASDAQ-100 moved sideways.  All three major indexes moved up in unison finding their intraday highs with one hour left in the session before rolling over to move lower into the close.  The major indexes closed significantly lower with the S&P-500 and NASDAQ-100 closing near where they opened, and the Dow actually closing higher than its lower open.  Still, that left all three to close below their 50-Day Moving Averages (DMAs) and in downtrend states.  The Semiconductor Index (SOX 423.34 -9.22) shed -2.1% on the day closing below its 50-DMA and in a downtrend state.  The Russell-2000 (IWM 81.37 -1.49) fell -1.8% and closed below its 50-DMA in a downtrend state.  The Regional Bank Index (KRE 25.31 -0.42) shed -1.6% and the Bank Index (KBE 24.38 -0.37) lost -1.5% closing below its 200-DMA.  The Finance Sector ETF (XLF 15.50 -0.22) shed -1.4% and also closed below its 200-DMA.  Long term bonds (TLT 95.78 +0.46) tested up to the underside of its 200-DMA before closing near its open price leaving behind a star like long legged doji which suggests this could be a top.  It remains in a trading state so a reversal here would be plausible.  NYSE trading volume was light at 715M shares traded.  NASDAQ share volume was also light with 1,669B shares traded.

There were no economic reports released and trading was dominated by negative sentiment about the PIIGS (Portugal, Ireland, Italy, Greece, Spain) sovereign debt.  Both Greece and France reported a pull back in PMI Manufacturing readings.  Greece’s debt rating was downgraded but this was already expected.  It was a revision to Italy’s debt outlook from stable to negative that was a surprise to traders.  All of this rocked the Euro resulting in a stronger U.S. dollar.  While the dollar fell from its gap up open, it still added six tenths of one percent on the day.

The price of the near term futures contract for a barrel of oil fell $2.40 to close at $97.70.  The yield for the 10-year note fell a basis point to close at 3.13.

Implied volatility for the S&P-500 (VIX 18.27 +0.84) gained five percent and the implied volatility for the NASDAQ-100 (VXN 19.21 +1.05) added six percent.

All ten economic sectors in the S&P-500 moved lower on the day led by Tech (-1.5%) and Energy (-1.4%).  In fact, only Consumer Staples (-0.7%), Telecom (-0.7%), and Consumer Discretionary (-0.9%) dropped less than one percent on the day.

Market internals were negative with decliners leading advancers 4:1 on both the NYSE and the NASDAQ.  Down volume led up volume 6:1 on the NYSE and by 5:1 on the NASDAQ.  The index put/call ratio rose 0.06 to close at 1.41.  The equity put/call ratio fell 0.06 to close at 0.70.

Commentary:

Monday’s trading was on light volume.  The Dow and S&P-500 continue to trade within a downtrend channel and are near the bottom of that channel at this time.  The NASDAQ-100 is also trading with a much less apparent downtrend channel of its own and is meeting an uptrend line here.  We would still advise adding call options of the Dow and S&P-500 dip to the appropriate level.  We are looking at the following levels as buying opportunities:

  • DIA at $122.90
  • SPY at $131.10

It is possible that DIA and SPY will be able to move briefly below these levels intraday which should provide time to purchase call options at market.  That is what we intend to do and will report on the prices after the purchase.  We are looking for June options at the money, so the $123 DIA and $131 SPY call options respectively.  This should afford us some of the best prices for those options seen on Monday.

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