The long-awaited oversold rally is underway. Is it just that -- a brief oversold rally -- or is it something more lasting? We don't know for sure at this point, but there is more work to do if it is more than just an oversold rally.

The $SPX chart is still bearish. The rally has pushed the index up towards resistance at 1270-1280 and towards its declining 20-day moving average (currently about 1275). That moving average is still declining, though, and so is the trend of $SPX prices. Thus, even if the rally were to get to 1270-1280, the $SPX chart would still be negative.



The equity-only put-call ratios have remained bearish, but as you can see from Figures 2 and 3, they have both curled over a bit. At this point, our computer analyses are still saying that these ratios are on sell signals, but it wouldn't take much to turn them downward into buy signals. As a result, the next few days are crucial in that regard.



Market breadth reached near-record oversold levels in the last week, as day after day of selling swamped the market. Now, in just two days of upside action, that oversold condition has nearly been relieved. Another day of advancing issues outnumbering declines will likely generate buy signals from breadth. However, that isn't quite confirmed yet.



At this time, the only confirmed buy signal is from the volatility indices ($VIX and $VXO). Both edged above 30 earlier in the week, and then reversed downward with a vengeance. That creates a short- term buy signal. If the upward trend of these indices is violated then that would be an intermediate-term buy signal. Specifically, if $VIX closes below 23, the trend of $VIX would be broken and that would be bullish.



In summary, we are suspicious of this rally, despite the buy signals from $VIX. It will be more important to see how the market handles the next decline, which should ensue soon. If that decline is modest and other indicators turn bullish, then we will consider adopting a more positive attitude toward this market. Even if this is another intermediate-term rally -- much as we saw in February and April -- we don't think this bear market is over.

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.