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By Lawrence G. McMillan

Stocks have continued their sharp pullback after failing to break through the bear market downtrend line. That challenge came in mid-August at the 4300 level, and the decline since then has been steady and swift. Oversold conditions are beginning to appear, and soon we will see some confirmed buy signals, but the $SPX chart is still bearish and so a "core" bearish position is recommended. Other signals can be traded around that.

$SPX found support at the 3900 level yesterday, and that is a valid support level from back in late July as well. Overhead, there is resistance just below 4100.

Both equity-only put-call ratios are on sell signals, as they are now rising again. The weighted ratio gave a timely sell signal a couple of weeks ago, but the standard ratio didn't confirm until just this past week. These ratios are not high enough on their charts to be considered to be in "oversold" territory. As long as they continue to rise, that is bearish for stocks.

Breadth has completely reversed from a relatively positive situation during the first half of August, to an abysmal showing over the past week. The heavily negative breadth in recent days has driven these oscillators -- which are now on sell signals -- into deeply oversold territory. However, oversold does not mean buy.

$VIX rose when the heavy selling began in the last week, and that was enough to stop out $VIX-based buy signals. However, new buy signals are setting up currently, and a decline by $VIX back below 24 would be bullish for stocks.

We continue to maintain a "core" bearish position. But the market has declined swiftly and is oversold, so bearish positions that have reached targets should be closed and others rolled down to lower strikes. Meanwhile, several buy signals will be setting up from other indicators, so they can be traded alongside the "core" bearish position.

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

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