"Volatility" has been the buzzword for the media and many others in describing this market. The implication, of course, is that if the market just wasn't so volatile, everything would be okay. That is wrong on many levels, but is the panacea that is being fed to the masses. In reality, the market is volatile because things are wrong; volatility is not the cause of it, but the reaction to it.

$SPX has had some wide swings of late, but even so it has been able to set up some clear levels of support and resistance. We have noted for some time that 1490 was a support level, for it was the level at which the index bottomed several times in May and June. Usually, when a support level is broken, it becomes resistance. That is exactly what has happened. The first strong rally in the current decline occurred on Monday and Tuesday of this week, and once $SPX reached the 1490 level, it was repelled strongly, falling about 50 points until it found some support near 1440 on Wednesday. Since then, we've rallied, making 1440 a support area. That makes some sense, because it is the level from whence the April - July bull leg erupted several months ago. We expect that support level to be retested in the near future. If it doesn't hold, then there should be some support in the 1410-1420 area, and finally there is support near the March bottoms at 1380. A decline of that magnitude would mean that a 10% correction had taken place -- something that is long overdue.



The equity-only put-call ratios are bearish. They were meandering a bit over the past couple of weeks, but now they have moved higher. They are signaling intermediate-term caution, and it is quite likely that they will rise for a while, eventually turning bullish (i.e., rolling over) from higher levels several weeks from now, or later.



Market breadth has been abysmal for some time now, and it really took a beating on the big declining days of last week. However, even this week, when the Dow was up 100 or more, breadth struggled to confirm that bullishness. As a result, breadth remains oversold. It will take another day or two of seeing more advances than declines before breadth officially turns bullish.



Volatility indices ($VIX and $VXO) soared to levels not seen since 2003 (and they were on their way down through these levels at that time). A spike peak in $VIX is a buy signal, and so we are likely not far from that now -- although it hasn't been confirmed yet.



So, for now, enjoy this short-term rally, but don't expect it to last. The true test will come when $SPX declines towards 1440 again.

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.