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By Lawrence G. McMillan

Stocks exploded out of a massive oversold condition this week and put together the best 3-day rally since....1931. That sounds a bit ominous, doesn't it? 1931 and 1932 were two of the worst stock market years on record. In any case, the bulls are enjoying the rally, and it has generated some buy signals from our indicators.

Oversold rallies typically rally up to, and slightly above, the declining 20-day moving average. That moving average is at 2670 and declining at the rate of 30 or 40 points per day, so we're almost there. On an overshoot of that moving average, we might see the oversold rally extend up towards 2730 or so.

The $SPX chart remains bearish, despite the strength of the oversold rally. All trendlines are pointed lower, and there are many pockets of overhead resistance.

Perhaps the most positive thing this week is that all of the equity-only put-call ratios (standard, weighted, and CBOE) are on buy signals, as is the Total put-call ratio. You can see from Figures 2 and 3 that these buy signals have come from extreme highs.

Market breadth has improved tremendously on the rally this week. In fact, the breadth oscillators are now on buy signals.

There is a $VIX "spike peak" buy signal in effect (from March 17th), although it hasn't performed well. In a more negative vein, $VIX has remained extremely high for a good reason. It is lower than realized volatility, but is obviously being "dragged" upward by the currently high levels of realized vol.

Our conclusion is that a "core" bearish position should still be held, but that these short-term counter-trend buy signals can also be traded.

This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.

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