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By Lawrence G. McMillan

Stocks came roaring back this week, after a massive oversold condition spurred the rally. As is typical for an oversold rally, $SPX rose all the way to and through its declining 20-day Moving Average. That brought it back almost to the old highs (4705) where it has met resistance before and did again. Meanwhile, the lows of last week at roughly 4500 are support, and there is also support at 4300 (the early October lows). So, there is a possibility that $SPX is still in a trading range (yellow area on the chart in Figure 1).

Equity-only put-call ratios continue to rise at a startling pace. Put buying has continued to be strong, even during the rally this week. The ratios will not generate buy signals until they roll over and begin to trend downward.

Market breadth has been as volatile as ever. The breadth oscillators generated buy signals as of the close of trading on December 7th. But breadth is already weakening again, so stay tuned.

$VIX generated a "spike peak" buy signal on December 2nd, and that is still in place. $VIX has been dropping since then, and the market has been rising. If $VIX can close below its 200-day Moving Average, that would be an addition bullish sign.

This is supposed to be the time of the year when small-caps outperform, and for a few days, IWM outperformed, but now it's down today while $SPX is up. This is more indication of the same problem that has beset the market for a while now: the "average" stock is struggling while $SPX merrily steams upward, pushed by a few favorite tech big-caps.

In summary, we are now seeing buy and sell signals set up. I like the "trading range" sceanrio until $SPX can prove that it is not in a trading range. Regardless, we will trade confirmed signals on both sides of the market.

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

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