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By Lawrence G. McMillan

Bear markets are tricky, and if what we are seeing now is the continuation of the bear market, it is exhibiting some of the actions that are designed to fool most of the people most of the time.

First, there was an upside breakout over triple resistance at 4100 last week. That seemed to give an all-clear to the bulls and put the bears on their heels. But the internal factors that were supporting that move have begun to wane, and -- even worse $SPX has now fallen back below 4100. If it closes below 4100 again today, there is a high probability that the upside breakout was false.

From strictly a charting point of view, there is now resistance at 4200 (the recent highs), which is also resistance from late last August. $SPX did not close the gap on its chart (in the circle on the chart in Figure 1). If this is truly a false breakout, that usually means $SPX returns to the next previous support level quickly. That would be 3900. Below that, the December lows at 3760 remain the next target. If that level is taken out in the first quarter, it is a strong indication that the bear market is still in place.

Most of the internal indicators of this market have held up pretty well, with one notable exception breadth, and that is important. The equity-only put-call ratios (Figures 2 and 3) continue to decline, and thus they remain on buy signals for the stock market.

Breadth is beginning to weaken now. After excessively negative breadth on four of the last five trading days, the breadth oscillators have now generated sell signals, as of February 9th.

$VIX has remained low, although it has risen off its lows slightly as $SPX has faltered over the past few days. But, for now, $VIX has not generated any sell signals. Longer-term, the trend of $VIX buy signal is still in place as long as $VIX continues to close below its 200-day MA, and that MA is still above 25 (and declining).

In summary, we are following our indicators as they generate confirmed signals. The fact that a false breakout may be occurring is certainly a major negative, and it would bring other sell signals along with it -- including the reinstatement of the "core" bearish position. We are not ready to take a "core" position yet, but if the market falls further below 4100, it may be necessary.

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

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