The nine trading days from December 27 through January 8 encompassed one of the swiftest, deepest corrections in history. 2008 is off to a worse start than any other year before. Technical indicators that were modestly bullish or neutral turned decidedly negative. The aftermath is that the market is wounded but oversold. We don't envision any lasting rallies until a serious amount of basebuilding is done, particularly in stocks. However, such a swift decline makes the market oversold, and thus sharp, but short-lived rallies can spring up at any time, as was the case in the last day and a half.

Let's start with $SPX. It fell through all of its support levels - 1450, 1430, and 1400 - before finding an intraday bottom at the 1380 level yesterday. This sets up the potential of a triple bottom on $SPX, as both March and August declines stopped at roughly the same level, although it is by no means certain that the current decline is over. Meanwhile, there is now resistance on $SPX at the 1430 level.



Equity-only put-call ratios worsened dramatically during this decline and have started to rise again, thereby canceling out their late-December buy signals and returning to sell signals (Figures 2 & 3). These won't give buy signals until they roll over and start to head downward again. Currently, that doesn't look likely.



Breadth has been negative, but is now oversold. The heavily oversold nature of all these breadth measures certainly augurs for at least a short-term rally.



Volatility indices ($VIX and $VXO) have been divergent as well. However, neither has really spiked up, thereby creating the type of exhaustion buy signal one would expect to see at the end of a sharp decline such as we've had in the past two weeks. Consequently, these are giving bearish readings as they are now in uptrends.



So, the $SPX chart, put-call ratios and volatility indices are negative, while breadth is leaning towards bullish.

Finally, in the course of preparing the Daily Volume Alerts newsletter daily, I look at a lot of stock charts. They are, in general, terrible. The damage done to most stocks will not be easily repaired. And the same can be said for the broad market indices as well.

So, even if these divergences are positive and we begin to eventually get some buy signals from the generally bearish indicators, this market will not just reverse and explode on the upside. It will take some base-building and retesting.

We would turn bullish only after buy signals emerge and a base is built.

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.