The oversold rally continues, and the Fed action this week pushed $SPX high enough to generate some overbought indications. $SPX has rallied straight up for seven days, eventually twice bumping into resistance at 805-810 and also hitting the upper Bollinger Band before falling back. The 20-day moving average of $SPX is down at 740, and has flattened out. If this is to be something more than a monster oversold rally, $SPX would normally pull back towards that moving average, establish a higher low, and then move on up to new highs. Thus, the chart would turn intermediate-term bullish, with higher highs and higher lows. So, the next pullback will be of importance to see how it fares.



Equity-only put-call ratios remain positive, after having issued buy signals in the last week. These ratios are continuing to decline, and that is bullish. It is a bit negative that the STANDARD ratio is already down to levels from which strong sell signals have previously been issued in the last year. But we go by the TREND of these ratios and not their absolute level, so as long as they're trending downward, that's positive.



Market breadth has been very positive, and has moved into deeply overbought at Wednesday's close. It has been the norm in this bear market, for the market to fairly quickly react to the downside after the breadth oscillators have become overbought. The longest it's been able to remain in overbought territory was right at the beginning of this year, when it stayed there for eight trading days before succumbing to a sharp decline.



Volatility indices ($VIX and $VXO) remain in trading ranges. VIX is near the lower end of its 38-53 range. We can draw a few conclusions here. First, with $VIX at 40, the market is still volatile, rally or not. Second, $VIX is in a minor downtrend, which is bullish, but nearly reached the 38 level today, before bouncing higher. Something has to give soon. Either $VIX will bounce higher, staying in the trading range, and that will be a negative for the broad market. Or $VIX will drop to new lows, which would be positive for the broad market. So currently, $VIX is modestly positive, but is at an inflection point.



In the near term, the market is overbought. We would expect a market pullback soon, towards the 740-750 area, as a lot of energy has been expended in a short time to get to this level. In addition to the overbought conditions cited above, stock charts don't look particularly strong overall, either. Such a pullback may even be healthy for the bullish case, if the higher highs/higher lows pattern sets up. In the longer term, we don't think this bear market is over, even if an intermediate-term rally is forming.

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.