By Lawrence G. McMillan
The selling that began with a modest overbought condition on October 12th has snowballed into a major decline, capable of testing whether or not a bull market still exists. Now the only remaining near-term support area is at 3200. If that gives way, a pattern of lower highs and lower lows will be in place, and that is the mark of a bear market. That would be a game- changer.
Equity-only put-call ratios are back on sell signals. The computer analysis programs called them a "sell" as of the close on October 26th. These sell signals are still from a very overbought state. Normally, these are serious sell signals when coming from such overbought extremes.
Breadth had been the strongest indicator on the September- October rally, but it has deteriorated badly too, and both breadth oscillators remain on sell signals -- and are in oversold territory.
New 52-week lows have finally increased enough to overcome new 52-week highs and generate a sell signal.
Even volatility -- which had sort of been in its own world, pre- occupied with post-Election events -- has suddenly jumped back into the fray. On an intermediate-term basis, a bearish development is taking place. $VIX has now closed above its 200- day moving average, which is at 31 and rising. The 20-day MA of $VIX is rising, too, and if it crosses above the 200-day, that is an intermediate-term sell signal. The last time we had one of those was February 20th (albeit it came from much lower levels).
In summary, there are plenty of cross-currents at this time. The bulls have been wounded but are not dead just yet. However, a close below 3200 by $SPX would be very negative and would solidify the bears hold on the market.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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