The bears finally seized their opportunity once resistance held at 930, and they have forced $SPX all the way down to the bottom of its wide 880-950 trading range. In fact, it broke down through the bottom of that range intraday on Wednesday, but a late rally prevented $SPX from confirming the breakdown on a closing basis. We consider it necessary for $SPX to close decidedly below 880 in order to confirm a downside breakout. Meanwhile, if the bulls can manage to pull off a rally from here, it would likely run into resistance in the 900-910 area.




The equity-only put-call ratios continue to rise and are thus still on sell signals. Since they started from such a low point on their charts, they have a long way to roam on the upside before we would consider them "oversold."



Market breadth turned decidedly negative in the last week, as the market sold off but has now reached oversold status. However, "oversold" does not mean "buy." So until these generate true buy signals -- which they would do with one more day of advances leading declines -- we consider them as still being on sell signals.



Volatility indices moved higher this week. Once again, $VIX has broken up through the downtrend line that has defined its intermediate-term decline since the March $SPX lows. If $VIX truly does break out on the upside, that would be negative for the stock market. A close below 29 would return $VIX to a bullish indicator.



In summary, the bulls may attempt a rally here, but we would not expect it to be particularly robust -- probably just enough to work off the oversold condition in the breadth oscillators. Thereafter, unless the indicators quickly change, we expect a downside breakout to 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.