The broad stock market virtually collapsed this week, but in doing so created a major oversold condition (in some sense, an historic oversold condition). That oversold condition is spurring the current rally which has extended 100 $SPX points in just a few hours. Even the bigger picture may be improving, although we will need confirmed buy signals in order to change our intermediate-term negative attitude.

The $SPX chart is negative in that there is a downward slope, and the 20-day moving average is declining as well. Even so, this oversold rally could conceivably carry all the way to the 20-day moving average, which is at about 1250 (in fact, it's almost there as this is being written). However, to turn the chart bullish a series of higher highs and higher lows would have to be established -- and that will take time.



The equity-only put-call ratios raced higher as the market sold off this week. The weighted ratio now appears to be on the brink of a buy signal, and it's conceivable that the standard ratio could roll over to a buy signal as well. At this point, those potential buy signals are not confirmed by the naked eye, but our computer analysis program is already calling them both a "buy."



Breadth has not been as bad as you might think, considering how hard the market sold off on many days. Breadth didn't fall into true oversold territory until Wednesday's close (Sept 17). That also exacerbated the oversold condition.



The volatility indices ($VIX and $VXO) skyrocketed in the last few days. $VIX rose to 42 at the market lows on Thursday, before retreating to 33 by the day's end. $VXO was similar, peaking at 46 and retreating to 36. Those look like spike peak buy signals in the volatility indices -- a bullish condition. $VIX would confirm that buy signal by closing below 30.



In summary, the massive oversold conditions that existed combined to generate the monster rally that occurred on Thursday and is continuing on Thursday night in Globex trading. That rally, in turn, has started to convert some of the other indicators into buy signals (equity-only put-call ratios and $VIX). We don't usually condone the idea of "V" bottoms, but if one were to ever exist, this might be it. We still must see the $SPX chart improve before we adopt a bullish attitude on the broad market. Eventually, though, these lows will be retested. The damage that was done to this stock market is not going to just go away in a bullish stampede.

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.