The recent volatility, coupled with the conflicting signals emanating from the government as it tries to come up with an acceptable rescue plan, have pushed most of our technical indicators back into oversold territory, canceling out recent buy signals. Perhaps a broader view is required before delving into the individual indicators. We are, once again, in the midst of a market meltdown in September. This has happened often enough that September is the worst performing month of the year. September declines tend to bottom in October sometimes in very nasty, climactic bottoms. Thus October is sometimes called the "bear killer." So, from the broad viewpoint of history, these September declines generally don't end until sometime in October, but then a strong rally takes place.

The chart of $SPX remains negative. It is trending downward, its 20-day moving average is sloping downward, and there is resistance at 1260-1265 as well as at 1220.



The equity-only put-call ratios have risen to very high levels on their charts, making them "oversold." A few days ago, it looked as if they might roll over to buy signals, but this week's decline has put that in doubt. Even so, it seems likely that they will roll over to buy signals fairly soon, but they have not done so at this time.



Market breadth has been schizophrenic, reflecting the fact that everyone piles on in the market's main direction of the day. But all breadth buy signals have been canceled by recent action.



The volatility indices ($VIX and $VXO) are both locked in steep uptrends -- and that's bearish. Yes, there was a spike peak last Thursday (September 18), which served as a short-term buy signal. But the only way that $VIX will issue an intermediate-term buy signal is for it to break down through its uptrend. A close below 30 would be the first step to turning bullish.


 
In summary, several of our indicators are oversold, but none are convincingly on buy signals. As a result, we expect to see lower prices over the near term. Sometimes, the nastiest market declines occur in the midst of an already oversold market -- so do not anticipate the buy signals; wait for true signals. Meanwhile, the chances of sharp, but short-lived oversold rallies are high. Even so, we won't turn intermediate-term bullish unless $SPX can overcome resistance at 1220 and, preferably, at 1265.

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.