Despite Thursday's setback, the $SPX chart remains bullish. It is above its uptrend line and as long as that is the case, a series of higher lows is in effect. $SPX had a problem making a higher high this week. It was accomplished on a closing basis, but not on an intraday basis. We'd like to see the 920 $SPX clearly pierced on the upside, to confirm that the bullish trend is still in place. At the moment, that area represents resistance. As for support, if the 820 level were taken out on the downside, all bullish thoughts would have to be abandoned.



The equity-only put-call ratios remain bullish. The most recent buy signals that were generated about two weeks ago, near the highs of each chart, are still in effect. These ratios have not declined that much yet, and therefore seem to have a good deal of room to run. Since the weighted ratio is at its lowest level since October, that is bullish.



Market breadth has generated sell signals. Breadth has not been a leading indicator, though, so we don't place too much weight on this signal by itself, provided it is not accompanied by other sell signals.



The volatility indices have not exactly collapsed, but they have slowly declined of late. As a result, the uptrend in $VIX has been broken, and a downtrend has resumed its place (Figure 4). A downtrend is bullish for the broad market. Overall, though, $VIX remains at a very high level, historically.



In summary, the current environment -- buy signals from put-call ratios and $VIX, and a positive $SPX chart -- still seems more bullish than not, although a close above $SPX 920 needs to be accomplished fairly quickly. Longer-term, we do not think this bear market is over and we expect to see a retest and possible violation of the November lows in early 2009. That sell signal is likely to be forewarned by a series of premiums on the $VIX futures -- a condition which is building up now.

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.