In not more than a couple of weeks, this market turned from a lumbering beast that had little volatility and had very little follow-through into a dynamic, volatile maniac that can whipsaw traders in the blink of an eye. For most of the previous 6 months -- and really, even the past 3 years if you stretch a bit -- volatility was very low, and the bulls pretty much had their way with things.  All minor declines were buying opportunities and even the slightest spike in volatility was a buy signal.  Those halcyon days are gone (good riddance, I say) and the playing field now belongs to the nimble -- or at least to those who understand option trading.

$SPX rallied last week after a massive oversold condition had occurred.  However, once traders had a chance to contemplate things over this past weekend, they became sellers -- with a vengeance. $SPX peaked near the resistance area of 1290, and also where it had bumped into the declining 20-day moving average.  Then $SPX dropped very sharply for 3-1/2 days, dropping all the way to 1235.  This violated the yearly lows at 1245, among other things.  A late rally on Thursday brought $SPX back above that 1245 on a closing basis.  However, we think the damage -- technically, psychologically, and monetarily -- has been done, and that the lows have not yet been seen.

The equity-only put-call ratios have exploded to new highs while this bearish action was taking place (see Figures 2 and 3).  They are clearly oversold, as they stand at near-record highs.  However, we have always warned against interpreting any fixed level as a buy or sell signal on these ratios.

Rather, one must wait for the averages to roll over and head down, in this case, before calling a 'buy' signal.  In fact, some of the worst declines in history have taken place in a market that was already oversold.   So, keep patient and don't anticipate a buy signal from these still-bearish indicators.

Market breadth was extremely oversold a week and a half ago. That contributed mightily to the rally that took place.  This week, breadth is far less oversold.  In fact, neither breadth oscillator has reached 'official' oversold status yet this week.  This is a perfect example of how a short-term, essentially meaningless rally, can alleviate an oversold condition and pave the way for the bears to wreak further havoc -- as they did this week.

Finally, volatility ($VIX) has been -- well.... volatile! $VIX's daily range has exceeded 2 points a couple of times and it has repeatedly pushed higher all week.  By the way, Friday's high on $VIX was 20.80   not the 22.59 posted erroneously by the CBOE.  The trend of $VIX is higher, and we think that is bearish.

There was a late-day rally on Thursday.  Bulls are asking if the worse is now over.  I doubt it.  When the market gets oversold, sharp but short-lived rallies are possible at any time.  These have the effect of creating a volatile, whipsawing environment within an overall bearish trend.  We still expect $SPX to complete its first 9% correction in over three years, which it would accomplish by trading down to 1207.

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.