The market staged a huge oversold rally this week, and now it remains to be seen if it is anything more than that. Wednesday's big rally seemingly came out of nowhere. At Monday's close, we had a numbe rof overbought readings which augured well for an up day on Tuesday, and it was, with the Dow gaining 215 points. But, in recent history, that's it. Big days are not generally followed by another big day. This time is was, with the Dow registering its biggest daily gain of the year on Wednesday -- up 354 points more. Needless to say, this has alleviated the oversold condition, but has it generated buy signals? Let's review the indicators.



First, the chart of $SPX remains in a downtrend. The big rally merely brought it back to its declining 20-day moving average. In a bearish trend it is fairly typical that the average would have sharp rallies back to its declining moving average. But 50 $SPX points in one day -- really! Moreover, the resistance at 1490 remains in place. We will not turn bullish unless $SPX can close above that area for at least 2 days.



The equity-only put-call ratios remain bearish, as they continue to rise on their charts. They are beginning to reach what we'd classify as "oversold" territory, for they have climbed to fairly high levels. But still, they won't generated buy signals until they roll over and begin to trend downward.



Market breadth has been extremely oversold. The last time that happened was at the August 16 bottom. The two big up days this week generated breadth buy signals. However, we would not take a position basedon breadth alone.

Finally, the volatility indices ($VIX and $VXO) present a somewhat mixed picture. They did not collapse as one might have thought they would (should?) have when the big rally occurred on Wednesday. Thus, they continue to remain in uptrends, which is bearish. However, both are now below their 20-day moving averages, and any further lower closes would begin to change that bearish trend.



In summary, the only confirmed buy signal we have is breadth.That's not enough to classify this as a true intermediate-term bottom. So for now, and until the resistance at 1490 is overcome, we are viewing this rally as nothing more than an oversold rally in an overall bearish phase. We would alter our opinion if $SPX closes above 1490 for two consecutive days.

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.