For the first time since the July lows, $SPX has etched a lower high, lower low pattern. This might not be the start of a serious downtrend, but it is certainly a "warning shot" of sorts. On the first trading day of September, the market plunged and then rallied strongly. The bulls hope that will happen again here in October, but the technicals are not as favorable now as they were a month ago.





As far as the $SPX chart is concerned, there are several levels of support which are important. The first level is where $SPX is right now -- at 1030. That is where the market topped in August. Below that, there should also be support at 1010, and then 980-990, at the August and September lows. As for resistance, the major resistance is the 1070 level. Any close above there would put the market back in full bullish mode.



The equity-only put-call ratios remain on sell signals.

Market breadth has been very strong all along since March, but has now turned negative,as declines have outnumbered advances on 7 of the last 9 trading days. As a result, sell signals have been registered.



Volatility indices ($VIX and $VXO) have been inflated for some time. However, that did not stop them from bolting higher today, and once again they have violated their bullish downtrend lines. Only if a true uptrend develops in $VIX would it be considered a sell signal for the broad market.



In summary, a correction is underway, and it is minor so far (40 $SPX points). So far, indicators have reacted modestly to the decline, as they are expected to do. However, if $SPX 1010 is violated, and if $VIX continues to trend higher, then a more bearish outlook would be warranted. On a more positive note, if $SPX holds at support and perhaps true buy signals are generated by the breadth indicators, then the bulls would assume control once again.

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.