The market, as measured by $SPX, came within a hair's breadth of breaking down, but it didn't. It did penetrate the uptrend line that had been in place, but that was all. Somehow, in Houdini-like fashion, $SPX still has a series of "higher lows" in place.

Now, after three strong days of rally, $SPX has climbed back to near the highs of this rally that began in mid-July. As a result, it's in a trading range, bounded by the high close (1305) and the low close (1266), both of which were set in early August. Despite a lot of volatile days, the market has made little progress since then. A confirmed breakout, on a closing basis, beyond those levels can be traded.



The equity-only put-call ratios have diverged, which is one of the reasons we view this rally with some skepticism. The standard ratio remains on buy signal (chart, above left). However, the weighted ratio has given a confirmed sell signal by turning higher and making a local minimum on its chart. We won't pick one over the other, since both have reliable track records, so we'll just have to call this indicator neutral for now.



Market breadth (advances minus declines) had been a laggard all year. Lately, it has been sluggish in both directions. That is, when the market declined a week ago, breadth wasn't bad enough to get oversold, and on previous rallies, breadth wasn't good enough to get overbought. In this most recent 3-day rally, though, breadth has expanded greatly.



Volatility indices ($VIX and $VXO) continue to decline and, as a result, they remain bullish as they are in downtrends. A $VIX close decisively above 21 would break that downtrend, but for now it remains intact.



In summary, the only sell signals are the weighted index put-call ratios. Meanwhile, $VIX and the standard equity-only ratio remain bullish. As long as $SPX remains in this trading range, we'll likely have mixed signals. However, if the market clearly breaks out of the $SPX trading range, we would trade it.

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.