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By Lawrence G. McMillan

Stocks charged ahead to a new yearly high at the end of the second quarter, but have faltered a bit since then. A rather sharp pullback occurred yesterday, based on fears that the central banks around the world are not done raising interest rates. That's news? I guess it was to those who sold yesterday. In any case, that pullback closed a couple of upside gaps on the $SPX chart. However, it has left a potentially important island reversal on the $SPX chart now (circled area on the chart in Figure 1).

If $SPX rallies back and closes yesterday's gap, thus rendering the potential island reversal harmless, then upside targets would initially be 4510 followed by 4630.

There is still support at 4330 the recent lows and there should also be strong support at 4200, which was the area that was holding the market back for so long earlier this year. As long as $SPX is above 4330, the chart is unequivocally bullish; a failure at that level, though, might lead to problems.

The equity-only put-call ratios (Figures 2 and 3) are slowing their rate of descent. However, they are not yet on sell signals. That would only occur if they began to rise and trend higher.

Market breadth continues its sort of "all-or-nothing" approach. Either it's very positive or it's very negative, very little in-between. This action has produced yet another sell signal from both breadth oscillators.

$VIX has been contained in the 13 to 15 range for nearly a month, but with yesterday's selling, it jumped up to 17 intraday, before falling back. If $VIX returns to "spiking" mode, that would be a negative occurrence, for the stock market can fall rapidly while $VIX is in "spiking" mode.

In summary, we are maintaining a "core" bullish position as long as $SPX remains above 4330. We will, however, trade other confirmed signals around that "core" position.

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

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