Ever since $SPX broke out to new 4-year highs in early March, it has struggled to add to those gains.  However, the technical picture has remained strong and support has been successfully tested.  Twice recently (in fact, on Tuesday of each of the last two weeks), the market has suffered a severe bout of selling.  In both cases, $SPX retreated to the 1293-1295 range, but then rebounded upward.  That confirms that area as valid support, and it is further strengthened by the fact that 1295 was previously a resistance area (see red line on chart, Figure 1).   As long as $SPX holds above 1290, say, the chart picture is bullish.

Equity-only put-call ratios appeared to give buy signals just over a week ago, but then canceled those out by moving to higher highs.  Now, once again buy signals are setting up.  The standard ratio, Figure 2,  has sort of a minor double top on its chart -- and is also now on a buy signal.  The weighted ratio, Figure 3, has just rolled over to a buy signal, according to our computer projections, which are usually accurate.

Market breadth (advances minus declines) has been a poor predictor.  It swings back and forth with the rather uniform institutional order flow that we are seeing more and more.  That is, the institutions seem to buy together or sell together -- usually for just one day at a time. As a result, the advance-decline line swings wildly in one direction and then the other, but it's hard to make a trend out of that. Finally, volatility indices ($VIX and $VXO) have been bullish in that they have been declining.  For example, on both the afore-mentioned Tuesdays, $VIX barely budged upward even though heavy selling was taking place in the broad market.  That reaction of $VIX was bullish.  In other words, traders were not panicking over the decline -- correctly predicting that it would be short-lived (and it was). $VIX traded below 11 again this week.  In the long run, such low levels of $VIX are not good for the market.  But, in the short run, the market can continue to climb as long as $VIX stays down here.

So, are we wildly bullish?  No.  There are problems, such as the fact that quarter-end window dressing has taken place and added some superfluous upward momentum to the market this week.  Also, the nearly historic period of time since there was a 9% correction (1,140 days) is something that will eventually have to be dealt with as well.  But, in the short term, it does appear that $SPX can fulfill our initial target of 1320-1325.

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.  Sign up today and take an extra 10% off tuition for Larry's 2-Day Intensive Options Seminar on May 20 & 21 in Houston.