The broad stock market has traded in a narrow range this week, as the bears and bulls battle it out over a small piece of territory. We are referring to this action as the embodiment of two different philosophies: the "glass half full" crowd (the bulls) says this is terrific action because the market is going mostly sideways, working off the overbought condition that was created by last week's breakout to new 6 year highs. However, the "glass half empty" group (the bears) says that the market is topping out, since it has been unable to follow through on last week's breakout. Specifically, since $SPX broke out on the upside on February 1, it has closed within an unbelievably narrow 3 point range between 1446 and 1450 every day. Usually, a narrow range such as this leads to a breakout move.



Ironically, the technical indicators are mixed. The equity-only put-call ratios, for example, are at odds with one another. The standard ratio is on a sell signal, as it has generally been working higher over the past few weeks. However, the weighted ratio remains on the buy signal that it generated a couple of weeks ago. It is unusual to see such a dichotomy between the two, but that is what we have at the current time.



Market breadth (advances minus declines) has been quite strong in the last few weeks -- a stark contrast to the lackluster breadth that has existed for most of the rally over the past 8 months.



Volatility indices have flirted near all-time lows once again. $VXO has closed below 10 several times, and $VIX has closed just above that crucial psychological level. Generally when $VIX is that low, a sharp, but short-lived market selloff materializes.



It is this last fact that, in our opinion, turns the weight of the evidence on this market to a slightly negative one. We would, however, change that opinion if a new upside breakout -- with $SPX closing above 1452 -- takes place. Otherwise, we are looking for a downward spike in the neighborhood of 2% or so.

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.