So, we have another false breakout -- this time on the upside.  Last Friday, the broad market indices rallied strongly to new 5-year highs, with $SPX breaking out above the 1313-1318 resistance area.  It was the largest Dow "up" day in a year.  However, once again there was no follow-through (it seemed like a layup for $SPX to rise to the top of its uptrending channel -- near 1335, but no!).  Now, that breakout has failed, with $SPX back down to 1305 and other averages struggling similarly. The Dow ($DJX) still remains the strongest index by far, with $SPX lagging behind, and NASDAQ (or QQQQ) in a far worse state than either of those.

$SPX continues to remain in a trading range, though, as shown in Figure 1.  The bottom of the channel is near 1300 now, and there is also a horizontal support line there as well.  So, the bulls are still in decent shape -- despite today's mauling -- as long as $SPX remains above 1300.

Three issues ago, we wrote an article outlining a system designed to profit from lack of follow-through on days in which the Dow moved more than 0.5%.  That system has been working well.  If you continue to think that this market is finicky and has no follow-through, you would want to go long Dow futures or options tonight.

The equity-only put-call ratios are mixed.  The standard ratio (Figure 2) is on a sell signal.  It has been wandering back and forth in a range since later March, but if it rises above the March highs, that would confirm a full-fledged sell signal.  Meanwhile, the weighted equity-only ratio (Figure 3) has just recently rolled back over to a buy signal.  This is unusual, but it accentuates the fact that most of our technical indicators are mixed, in the wake of this tedious, dull, rather trendless market.  The public just doesn't have a strong opinion, and so sentiment indicators such as the put-call ratios are wavering.

Breadth was not all that great during the most recent rally phase.

Finally, $VIX has been edging higher for some time now (it made its lows nearly two months ago).  This week, it was inflated in advance of the Fed's meeting, and now is rising strongly as the market falls.  But, if you look at the long-term downtrend in $VIX (Figure 4), you can see that this rise in $VIX doesn't mean much, yet.

Our intermediate-term outlook is bearish (no 9% correction for 1,181 days; 4-year Presidential cycle; and general bullish euphoria in the media), but we wouldn't buy puts on the major indices unless some of the major support areas were broken: 1300 and then 1285, basis $SPX. Even though today's Dow decline is the largest in 4 months, one big down day may not mean much more than last week's big up day did.  So, until proven differently, we continue to expect this market to trade in a range, with frustrating lack of follow-through.

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.