The broad stock market broke down this week, when $SPX fell below what had been support at 850-860. This resulted in an almost immediate test of former support at 820, which held. Today's positive intraday reversal was somewhat impressive. However, the chart has taken on a decidedly negative slant now, with resistance at the afore- mentioned 850-860 level, and then at the now-declining 20-day moving average near 880. We expect that this breakdown will eventually lead to a retest of the November lows.



The equity-only put-call ratios have weakened as well. The standard ratio has officially rolled over to a sell signal. The weighted ratio, however, while edging higher, is still in doubt as to whether an uptrend is starting (bearish) or not (bullish). The standard ratio had reached low enough levels on its chart to be roughly equal to where previous sell signals occurred, last September and May.



Market breadth has been more volatile than any other indicator. As a result of the recent decline, breadth became oversold, but not oversold enough to generate buy signals.



Volatility indices ($VIX and $VXO) exploded on the upside during this latest market decline. As a result, they ripped through the downtrend lines that had previously existed, and instead have establish new uptrends. That is bearish -- a sell signal for the market. Today, $VIX reversed downward in an intraday spike as $SPX reversed upward. But the trend is now higher and that is bearish.



In summary, the breakdown in $SPX, accompanied by sell signals from the equity-only put-call ratios, breadth, and $VIX, is bearish. Oversold, counter-trend rallies can spring up, but they should be contained by the declining 20-day moving average.

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.