A tired market finally succumbed to some selling on Thursday. Now everyone wonders how much -- if any -- more is to come. At this point, it's too soon to say that the bull is dead. A review of the indicators shows that they haven't turned bearish yet, but with continued downside action, they will.

$SPX pulled back today to its general support area. There are several support areas in the 1500-1510 area: the 20-day moving average, the uptrend line that has defined this rally since early March, the Chandelier stop (a volatility-based type of moving average, which we often use to set our trailing stops), and finally the chart support at almost exactly 1500 -- where several daily bars bottomed in early May. We expect $SPX to find support in this area somewhere.

If $SPX were to close below 1500, that would be a major violation of short-term support. In reality, though, the May lows at 1490 represent the final demarcation line. If that level is violated, then a more serious, intermediate-term decline would probably be in the cards. It should also be noted that the steepness of the uptrend in $SPX since early March was unsustainable. It's amazing it has lasted as long as it has. However, that doesn't necessarily mean that the bullish leg is finished. Rather, a pullback towards that 1490 support area, followed by another rise in the market, would define a less steep trendline while still leaving the intermediate-term bullish case intact.



There are some seasonal bullish patterns at work now, as well. With Memorial Day approaching, the market usually has a positive tone at the end of this week, and with May month-end occurring next week, that is usually bullish as well. So, these may contribute to firming the support in the 1500-1510 range.



What makes the situation more potentially bearish from an intermediate-term point of view is the fact that the equity-only put-call ratios are nearing sell signals. In fact, during this week, our computer analyses "declared" a sell signal from the weighted ratio. The standard ratio is not far behind. In the past, the weighted ratio has sometimes generated early sell signals, but this is certainly something to be wary of.

Market breadth has generated sell signals, as of today's decline. We use breadth signals as confirming indicators, and in that regard, they are important and meaningful at this time.



Finally, the volatility indices ($VIX and $VXO) have remained surprisingly subdued. They continue to bounce around in the 12-14 range, but have not really begun to trend upward -- something that usually accompanies a more serious market correction. The $VIX futures are worth watching, too. At this point, they are creeping higher with $VIX -- which is somewhat bearish.



In summary, the indicators are beginning to turn bearish for the first time since late February. The sell signals in breadth and the equity-only put-call ratios are a clear warning sign. However, as long as $SPX remains above the 1500 support level, we would not "pull the plug." Even then, it would take a close below 1490 before one could think in terms of an intermediate-term decline.

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.