That's really cute. Sounds like she read it, but doesn't want to be pressured even slightly (and I understand you weren't intentionally pressuring her). That means to me that she probably is ready to go forward with her reading, but might do better in the short term if she does it either entirely on the down-low, or else on her own.
One thing that my younger son has been enjoying is playing on starfall.com by himself, with a miniature mouse. This helps develop beginning computer skills (he's quite proud of them lol) and he can do whatever he likes, and in whatever order. Do you think that'd work for your daughter? If so, I'd take her to a local Staples or similar store and find a mouse that fits her hand well, if you don't already have one. I found that DS the younger was initially making a lot of misclicks due to the scroll wheel, so in retrospect I'd have tried to find one with just a couple of buttons on the top.
I tend to shudder at the sorts of electronic products that flash lights and beep at the user, but Fridge Phonics is another idea for letting her progress on her own. If you buy it, I'd make sure to get the lower-case letters and put the upper case for a while. A while back I bought the "Letter Factory" DVD by Leapfrog as well based on the consistently high reviews, and it was well received by DS (my only quibble with that one is the near-exclusive focus on the upper case alphabet).
I note that according to the set of facts you've given, the sign was in mostly lower case, but what you wrote was all upper case. Do you think that might've had something to do with her frustration?
