The rally that started two weeks ago culminated with $SPX reaching 1440 on Monday morning. Since then, selling has been invogue. The market basically declined for two and half days into Wednesday's close. That broke the 20-day moving average and violated the 1400 support level, but it did not break the rising trendline from the March bottoms. That trend line is at 1390 currently, and there is previous support at that level as well, so that is the area we must watch (there is more than one trend line which can be drawn, bu tthis is the one we think is the significant one -- see $SPX graph, figure 1).



The equity-only put-call ratios have been on buy signals since the March bottom, but they are now wavering. Both ratios, have curled upward. If they truly roll over and begin to rise, that is a sell signal. Our computer analyses declare that the weighted ratio (Figure 3) is already a confirmed sell signal, but the computer is not issuing a sell signal for the standard ratio yet (Figure 2). When and if the standard ratio's sell signal arrives, that should signal the next leg of the bear market.



Market breadth has been rather poor all along, and breadth gave sell signals early this week. By itself, breadth has not been a particularly reliable leading indicator, so we have generally considered it be merely a confirming indicator.



The volatility indices have -- like $SPX and the put-call ratiosbeen in a clear bullish (down) trend since mid-March. That trend continues in $VIX. Its moderate rise early this week did not violate that trend line; it merely rose to the 20-day moving average. By our reckoning, $VIX would have to close above 19, at least, and preferably above 20, in order for this indicator to be declared as bearish, meaning that its down trend was broken.



In summary, the bulls are still in position to keep this rally going, but they are running out of time. A decisive close below 1390 by $SPX, coupled with a rise in $VIX, and a confirmed sell signal in the standard equity-only put-call ratio would likely launch a new bearmarket leg.

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.