Weekly Commentary 10/12/2012

By Lawrence G. McMillan

We have been bullish continuously since early June. But recent events and indicator changes have put this short-term forecast into jeopardy.

$SPX has support at 1430 from two downward probes in September. This week, that has also been the low. Hence, it has become important support.

One of the more negative developments is the fact that both the standard and the weighted equity-only put-call ratios are on sell signals now.

Market breadth has gotten quite negative as well. After registering a strong overbought condition back on September 14th (right after the Fed's latest announcement), breadth began to deteriorate and hasn't stopped yet.

Volatility indices ($VIX and $VXO) have not confirmed the bearishness of the put-call ratios or breadth. $VIX has barely risen this week and, in fact, was down 8 cents on Wednesday, even though the Dow was down 128 and SPX was down nearly 9 points. VIX would have to rise above 17, at a minimum, to take on a less bullish tone.

An $SPX close below 1420, coupled with a $VIX close above 17, would clearly break the market's uptrend and would dictate a more cautious outlook. If that happens, aggressive traders could buy SPY puts for an outright speculation.

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