Extreme volatility, especially on Tuesday and Wednesday of this week, has left many investors and traders not only exhausted but disgusted. While gyrations such as these might be fun for short-term traders, others view them as obnoxious. Let's see if we can make some sense of what appears to be random activity at best and carnage at worst.



First of all, the previous support/resistance level at 1490 on $SPX has been obliterated and is no longer useful as a guideline. Second, the $SPX chart is clinging to some vestiges of bullishness: the 20-day moving average is rising, and there is support at 1465-1470, which has been tested three times now. From a longer-range perspective, though, $SPX appears to be in a broad and volatile trading range, from roughly 1410 to 1560 (using closing prices).



The equity-only put-call ratios rolled over to buy signals late last week and are still on those buy signals. The negative day on Tuesday put a little "wiggle" on the put-call ratios charts, but not enough to cause them to cancel out their recent buy signals. Since these are intermediate-term indicators, this is perhaps the most encouraging bullish sign at the present time.



Market breadth has weakened considerably and is now on a sell signal.

The volatility indices ($VIX and $VXO) have diverged a bit, but both are still in downtrends, and thus we are interpreting them as bullish. The 20-day moving average of $VIX is declining and is near 24. Also, $VIX spiked up to about 24 on Tuesday, before falling back.So, if $VIX closes above 24, that would be bearish. However, unless that happens, it is conducive to the bullish case.



In summary, the bullish case can still be made. In that vein, a close below 1460 would certainly usher in some panic selling. But, failing that, higher prices should evolve during this bullish seasonal period.

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.