The broad market has taken its first severe hit since last October.  In the process, it has become very oversold on a short-term basis.  At the same time, however, severe technical and psychological damage has been done, and that might take considerably more time to repair.

$SPX has fallen through all of the major support levels that had been built up earlier this year: the April lows (1280), March lows (1270), and February lows (1255) all gave way. Finally, some support was found at the yearly low (1245).  An oversold rally now appears to be underway.

"Oversold" is almost an understatement.  For example, the equity-only put-call ratios are racing upward and are near the tops of their charts (Figures 2 and 3).  The standard ratio, in fact, is at its highest level since October, 2002.  While it might not be fair to directly compare the data from then and now (because of changes in option volume), it is certainly worth noting.  But, neither ratio will be on a buy signal until it rolls over and begins to head down.

Market breadth reached extreme oversold levels as well.

Volatility ($VIX) shot higher -- to nearly 20 -- breaking several down-trending lines in the process.  While $VIX got "oversold" in that it spiked so far above its moving average, it may have established an intermediate-term uptrend (and that's bearish).

In summary, these technical indicators are all oversold and that has spurred a sharp, but usually short-lived rally is likely.  On a broader scale, though, the market is likely to decline further until a true intermediate-term bottom (with true buy signals) is in place. It remains to be seen if the bulls are wounded (the knee-jerk "buy the dip" crowed has certainly been chastised), which could lead to a longer-term bear market.  Remember, there hasn't been a 9% correction since 2003 -- the second longest hiatus on record between 9% corrections. $SPX would have to fall to 1207 to complete such a correction.  That is certainly possible, especially if the sentiment has changed to bearish.

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.