The $SPX index traversed its entire trading range in just a few days this week. On Monday, it appeared that it might break out to the upside, after having risen above minor resistance at 850. But that didn't happen, as 880 proved to be resistance once again. Then, after a very negative day on Tuesday and a pretty bad one (intraday) today, it reached all the way down to the support area at 805-810 before bouncing again. Both the rejection at 880 and the bounce today at 805 seemed to be news-induced (Geithner's say-nothing plan caused the decline, while rumors of a mortgage rescue plan spurred the bounce).



The equity-only put-call ratios remain on buy signals -- a major achievement, considering the pasting the market took this week



Meanwhile, breadth got overbought early in the week and gave a sell signal -- albeit not until the market had already been creamed on Tuesday. In recent months, breadth has not been allowed to get oversold enough to generate buy signals -- at least not by our measures.



Volatility indices ($VIX and $VXO) have hunkered down into narrow trading ranges. It's almost incomprehensible that $SPX could move from 880 to 800 to 840 in the span of three trading days and $VIX would actually drop in price. At this point, the 38 level on $VIX is still a significant level, and if $VIX closes below there it should be a bullish sign for the overall market.



In summary, traders should play the trading range -- buying near the lows and selling near the highs -- but be prepared to reverse positions on a strong breakout move, which will eventually occur.

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.