The S&P 500 Index ($SPX) was the lone holdout against an increasingly negative array of technical indicators. And, for a while, it was doing a stellar job as the index bounced off the 1490 support five times between October 22nd and November 5th. All the while, the underpinnings were deteriorating as $VIX and put-call ratios issued sell signals. Finally, on November 7th, $SPX plunged below 1490, and a torrent of selling erupted after that, sending $SPX down to 1450 in just a few hours' trading.



The equity-only put-call ratios (Figures 2 and 3) have been toying with sell signals for a couple of weeks. However, just last week, the weighted broke down to new lows, canceling out any previous sell signals. But, just as swiftly, that ratio began to rise and a sell signal was confirmed earlier this week. That accompanies the double sell signal from the standard ratio.



Market breadth has been quite poor. It is oversold now, but that doesn't mean much, except that short-lived rallies are possible. Volatility indices ($VIX and $VXO) started to head higher on November 1st. It made new post-August highs and bearishly established an uptrend. As long as $VIX continues to climb, it is considered to be on a sell signal. What we're now watching for, as a potential reversal to this bearishness in $VIX is for a spike peak on its chart.



In summary, we've turned bearish. When $SPX was above 1490, we were inclined to give the bullish case the benefit of the doubt and that was the correct inclination, as evidenced by repeated rallies off of support or out of oversold conditions. But now that the trend of $SPX has rolled over, we have the opposite take on things: rallies towards 1490 are meant to be sold, and oversold conditions are to be viewed with caution.



Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.