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By Lawrence G. McMillan

Sunday's overnight rally turned into a full-blown "melt up" by midday on Monday, as traders were literally in a panic to buy stocks.  It was a "90% up day" nearly all day long.  Very late in the day, the market started to decline, but then a whole new buying explosion occurred, driving prices to new highs for the day, and closing right on those highs.  In the end it was a "90% up day" in terms of NYSE-based data and a "90% up volume day" in terms of "stocks only" data, just barely missing a full-blown 90% up day.  

Perhaps the most positive aspect of this move is that $SPX closed well above its 50-day moving average – for the first time since late July.  Likewise, $VIX closed below its 50-day moving average as well.  Finally equity-only put-call ratios have rolled back over to buy signals.  In a "normal" market, this data would be strong evidence of a bullish breakout.

But this isn't a "normal" market, and there are a lot of other factors that might cast some doubt on this move.  First, it came on a banking holiday (Columbus Day), so only a partial trading force was participating.  The most egregious example of this was back in 2002, in the midst of a nasty summer decline, when the 4th of July occurred on a Thursday.  The stock market was open on Friday, July 5th, but many traders had taken off for the 4-day weekend.  The Dow was up 325 points that day, in a manipulated market.  Those gains were lost within two days.  There are some who think that Monday's action could be a similar manipulation in a low-volume environment.

That's not the only potential problem, though.  Two of the last three days have been "90% up days."  As we know, in the current market, that is a call for a sizeable downside move – probably with a day or two.  Again, in a "normal" market, that downside move would be short-lived, but in the last two months, any such reactions have taken $SPX completely to the other side of the trading range.

Speaking of trading range, there is $SPX resistance at 1200-1220, so if this is to be a bullish breakout, that should be taken out soon.  The next resistance is at 1260, and that would likely prove to be more formidable.  In a similar fashion, $VIX has "support" at 30, and traders might be tempted to sell the market should $VIX drop to that level – which isn't all that far away.

Breadth oscillators are on buy signals, and are beginning to enter overbought territory.  Hence, a modest pullback in the market would likely generate breadth oscillator sell signals once again.

In summary, the combination of exceeding the 50-day moving average, plus equity-only put-call ratio buy signals should be bullish, and we are playing it that way.  But not everything is in agreement, especially with overbought conditions appearing again. 

This market commentary was taken from this morning's Daily Volume Alerts Newsletter.