The breakdown through several support levels by $SPX has ushered in some very negative market action -- likely setting in motion the next downward leg of the bear market. Things have really accelerated this past week with the breaking of the 1370 level. That area now represents major resistance, with several other levels above it. As for support, there may be some near the April lows at 1325-1330, as today's decline bottomed near that level as well (1331).



The equity-only put-call ratios have remained steadily on the sell signals that they first generated about three weeks ago. The standard ratio (Figure 2) had a bit of a "wiggle" when $SPX was fooling around at the 1400 level, but that was quickly dispensed -- and a solid sell signal confirmed -- when $SPX broke down below 1390. As you can see, they are still relatively low on their charts and likely have a long way to rise while still on these sell signals. As long as they are rising, that is bearish for the broad stock market.



Market breadth has been abysmal on this decline, and as a result breadth is in oversold territory. That does not mean, however, that one can buy the market, for severe declines often occur during an oversold condition.



The volatility indices have established uptrends, and that is bearish. The confirmation of this $VIX sell signal came last Friday when $VIX spurted substantially higher as the market dropped. That established a pattern of higher highs and higher lows for $VIX, which defines an uptrend. As long as $VIX remains in this uptrend (Figure 4), it is bearish for the broad market.



In summary, we have no buy signals from our indicators. However, we do have oversold conditions. Thus a short-lived and potentially powerful rally could spring up at any time. We think any such rallies should be sold.

We think that this new down leg is strong enough that it will have to be resolved with a typical capitulation low -- involving a spike peak in $VIX and put-call ratio buy signals near the top of their charts. By the time all that happens, it would not be surprising to see $SPX in the neighborhood of the March lows. If so, it will be interesting to see whether or not a "retest" holds.

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.