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By Lawrence G. McMillan

Stocks are still reeling from the failed upside breakout over 4100 in February. You don't hear much about it in the financial media, but it is a large psychological weight on the market. Moreover, the resistance area that was left behind when the market retreated after its failure is strong, in the 4080 4200 area.

This week, $SPX finally tried to rally for the first time since that breakdown. It was merely an oversold rally and ran right into that resistance area as well as the now-declining 20-day Moving Average. Since then $SPX has retreated sharply, with Tuesday and Thursday both being large down days.

If, by some miracle, $SPX were able to rise above 4200, it would still be facing further resistance at 4300. On the downside, $SPX has fallen towards support at 3900 once again. The larger support area, though, is from 3760 to 3850, which is left from the latter half of December.

The Dow Jones Industrials have already broken down below their December lows. $SPX could well be next. A violation of the December lows, in the first quarter of the following year, is generally a very negative sign.

Equity-only put-call ratios remain solidly on sell signals, as they continue rise at a fast pace. These sell signals will remain in place as long as the ratios are rising.

Market breadth has deteriorated badly this week, and Thursday was a 90% down day. Both breadth oscillators are now back on sell signals having canceled out recent attempts at buy signals. Moreover, they are both in oversold territory, although "oversold does not mean buy."

Even $VIX seems to be getting a little worried, as it jumped over three points higher on March 9th and thus is back in "spiking mode" again. That is an oversold condition which will eventually lead to another "spike peak" buy signal.

In addition, the trend of $VIX buy signal could be coming into question as well. The 200-day Moving Average of $VIX is at 24.20 and falling. At this moment, $VIX is at 23.21. If $VIX closes above the 200-day MA, that would cancel out the trend of $VIX buy signal.

Tuesday's decline was sparked by comments from Fed Chairman Powell, when testifying before Congress. As we noted in our daily letters this week, that is quite reminiscent of the market's reaction to then-Fed Chairman Arthur Burns during the 1973-74 bear market. Back then it was the "3 I's" that were bothering the market (Interest rates, Inflation, and Impeachment). Today we have the "2 I's" (Interest rates and Inflation), and the market is still predominantly concerned with those. The bulls can drag out all the long-term indicators they have, but the market is still worried about the "2 I's."

We are still carrying a "core" bearish position, because of the negative $SPX chart and because of the strong sell signals from the equity-only put-call ratios. We have tried to trade other confirmed signals around that, and current oversold conditions indicate that perhaps other short-term buy signals might be popping up soon. Regardless, this is still a bear market until proven otherwise by $SPX price action.

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

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