The market rallied strongly the past three days. Whether it's due to the "January Seasonal Effect," (which I believe is the case), or to some other extraneous events -- such as the Fed's benign comments on inflation makes little difference. $SPX has now broken out to yet another new 6- year high. Hopefully, it will be able to make more of it than last week, when it broke out to new highs on the 24th, only to collapse in a torrent of selling on the 25th. If this upside breakout can hold, then the bulls are in charge once again, and the "trading range" scenario can be discarded.

Both equity-only put-call ratios are on buy signals again. The weighted ratio rolled over to a buy signal over two weeks ago, but the standard ratio just chimed in yesterday. These buy signals are not emanating from a deeply oversold level (i.e., not from high on their charts), but that doesn't really matter a lot. These buy signals will now remain in effect until the ratios roll over and begin to rise once again.





Market breadth (advances minus declines) has been very strong this week, as you might imagine. Breadth has been a confirming, rather than leading, indicator for months now, and this week has seen no change in that status.



Volatility indices have been the most consistently bullish indicator all along. $VIX has not risen above the 13 level, on a closing basis, in months. As long as that is the case, the market can work higher -- as long as $VIX doesn't get too low. Eventually, $VIX will break out decisively above 13, and that will probably be bearish when it happens, but at the present time, that doesn't look to be a likely event.



In summary, we expect the market to continue to work higher, as there are no sell signals amongst our technical indicators at the present time. Short-term caution flags might be raised if $VIX closes at or below 10, or if the breadth oscillators break down after a couple of days in which declining issues lead advancing issues. But those are minor points. Bullish positions can be maintained as long as the major technical indicators refrain from sell signals.

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.