This market has reverted to its old ways, in one respect: there isn't a whole lot of follow-through from one day to the next.  That was its trademark for most of the early part of this year.  However, there is one major difference between now and then: volatility.  Now, the market is bouncing around with abandon; 10 point moves in $SPX are becoming commonplace.  Previously, though, the moves were small and dull.  In any case, this back-and-forth action has given hope to both bulls and bears.   But the trend is with the bears, and so in our opinion they have the upper hand until proven otherwise.

This week's action is a case in point. $SPX rallied strongly on Wednesday, only to fail once again near the 1260 area.  That is the same area that constrained last week's rally, and also is the same general area that previously had been support for the lows in both February and May. Once support like that is broken, it then becomes resistance, which is what it is now.  Furthermore, the decline today solidifies 1260 as resistance once again.  So, no matter what the other indicators are saying, it's difficult to be bullish unless $SPX can clearly close above 1260.

The equity-only put-call ratios are toying with buy signals. Actually, the standard ratio has confirmed a buy signal (as of two days ago).  The weighted ratio appeared that it would do the same, but then it spurted to new highs, and so it remains on a sell signal -- still trying to find that rollover point that would be considered a buy signal.  These are generally strong intermediate-term indicators, but they can't do the job alone.  They need some confirmation from other indicators.

Market breadth (advances minus declines) has been rather poor all year long, and the recent selling drove breadth deeply into oversold territory.  It is still in that state.

Finally, volatility indices ($VIX and $VXO) have taken a terrible beating.  Both had fallen about 40% from their peaks through Wednesday's close.  That sort of decline is a short-term buy signal, although the market hasn't really been able to do much with it, except for a scattering of one-day rallies.  In a more negative light, the trend of these volatility indices is clearly higher (using a 20- or 50-day moving average, say), and that is negative for the broad market from a longer-term perspective.

In summary, the massive oversold conditions that we saw in the last two weeks resulted only in classic sharp, but short-lived rallies that have stalled out near the 1260 area on $SPX.  That is heavy resistance, and the major trend is still down (as evidenced by the fact that none of the rallies has been able to penetrate through the declining 20-day moving average of $SPX).  However, if $SPX were to clearly close above 1260, and if the technical indicators moved to buy signals (which they probably would: breadth is near buy signals and the weighted put-call ratio could join in on a rally), then we'd expect to see a short-term rally to perhaps the 1290 area or so.  However, unless things got a lot more bullish on that rally, we'd still expect to see the bearish trend reassert itself later.

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.