Selling has continued at a rapid pace ever since the market topped out a week ago Monday. That much selling in such a short time produces a sizeable oversold condition, and that is what we have now. In the process, though, what had been a very positive technical backdrop has been heavily damaged by the recent selling.

The $SPX chart is negative. Not only is it in a downtrend, but the multiple support level at 1040 was broken this week.



The equity-only put-call ratios, which had given well-timed buy signals in early June, have now rolled back over to sell signals.



Market breadth has been negative over the past nine trading days, and breadth sell signals are in place.



Volatility indices have risen quite a bit in the last two weeks, as the market has fallen. However, they have not been nearly as bearish -- on a relative basis -- as things like breadth or put-call ratios.



In summary, expect a sharp, but short-lived oversold rally soon, but be mindful of the fact that as long as the $SPX chart is in a downtrend, any technical breakdowns should be respected.

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.