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By Lawrence G. McMillan

The selloff that started from the 4600 level in late July has blossomed into a full-fledged downtrend that is gaining momentum. The selling is nearing major support levels, at 4330 and 4200 (horizontal lines on the chart in Figure 1). As one might imagine, as the selling has magnified, oversold conditions have appeared. However, as we have seen over and over again, "Oversold does not mean buy." It is necessary to wait for confirmed buy signals before jumping into the deep end of the pool. Those might not be far off, but in my opinion, it would still be very negative if $SPX were to close below 4330.

One area that is stark evidence of the selling momentum is the rise in the equity-only put-call ratios. Both are racing higher now, and thus they remain on sell signals. These sell signals will exist until the ratios roll over and begin to trend downward.

Breadth oscillators, on the other hand, are deeply oversold. Breadth has been negative for 13 of the last 14 trading days, and the last eight days in a row. Despite that, these ratios are not going to reverse to buy signals quickly. There could be a day or two of positive breadth, and the sell signals would still persist.

The selling in stocks has produced some strong negative indicators from the market internals discussed above. However, $VIX is a laggard once again. Yes, it has risen some from its July lows, as is to be expected. But it is struggling to get above 18 and hold there. In a broader sense, the trend of $VIX buy signal is still in place and will continue to be until either $VIX or its 20-day Moving Average crosses above the declining 200-day MA (which is at 18.80 and declining).

Since $SPX has not fallen below major support at 4330, the $SPX chart is still in an uptrend -- one that is under pressure, for sure, but still an uptrend. As a result we are maintaining a "core" bullish position, albeit one with a small delta. Meanwhile, we are trading other confirmed signals around that "core."

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

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