The market encountered some rough water last week and early this week, as it broke down below what had been support in the 1510-1520 area (basis $SPX). At the same time, other technical indicators chimed in with sell signals. A mildly oversold condition occurred when $SPX declined towards support at 1490. Then the market rallied back towards resistance at 1510-1520 (support, once violated, generally becomes resistance). This was all "normal" action, but then the Fed released its Beige Book report on Wednesday afternoon and very heavy buying has taken place since. As a result, despite continuing sell signals from some of our technical indicators, the picture is no longer definitely bearish (nor is it bullish -- as you shall see when the individual indicators are discussed). Therefore, we are adopting a neutral stance at the current time.

$SPX now has support at 1490, as noted above. Any close below there would return the entire picture to a bearish status. However, $SPX has rallied strongly from that level and has now closed above the 1520 level, meaning that is has overcome resistance at 1510-1520. $SPX could now move somewhat higher, although thereis relatively heavy resistance all the way up to the highs at 1540. Perhaps it has just established a rather wide trading range of 1490 to perhaps 1540. The market is much more volatile recently, so it's not impossible to consider that $SPX could gyrate quickly within that range.



The equity-only put-call charts (Figures 2 & 3) remain on sell signals. I really do not like taking a position that differs with these usually reliable intermediate-term indicators, but the bulls have been so excited about the disappearance of inflation (if you believe the Beige Book report) that they are throwing money at the market. Perhaps tomorrow's CPI Report will bring a dose of reality to the market. If that pushes $SPX back below 1520, then modest bearish positions could be considered again.





Market breadth has been extremely positive or extremely negative, switching from day to day on a moment's notice (see box, below left). Technically our breadth oscillators are modestly overbought right now, but the important "stocks only" oscillator never got oversold enough to generate a buy signal.

The volatility indices rose sharply during the decline, but have now fallen back below the 14 level. That's a buy signal, and $VIX has now returned to neutral status. Since overall (actual) volatility has increased, it is probably about right to see $VIX reside in the 13-14 area.



In summary, $SPX price action has overcome resistance and is neutral to bullish, breadth is neutral to slightly positive, and $VIX is positive. Only the put-call ratios are bearish. So, the evidence seems to indicate a neutral or trading range approach. This could last until $SPX sets up a new breakout move. So, while we are still somewhat suspicious of this latest rally, we are officially adopting a neutral outlook for now.

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.