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By Lawrence G. McMillan

Technically, $SPX is still within the 4330-4540 trading range, but it is now probing the low end of that range. Prices and internal indicators were deteriorating slowly until the FOMC meeting this week. After that, $SPX took a big drop on Thursday. The fact that the week after September expiration is a seasonally weak period for the market has added to the bearishness. There is now a gap on the $SPX chart, which would be filled on a rally towards 4400, so that represents a resistance area now. Even so, I am still of the opinion that $SPX needs to fall below 4330 or rise above 4540 in order for some sustained momentum to be seen.

Equity-only put-call ratios have toyed with buy signals over the past week. Both ratios moved lower for a few days, giving the appearance to the naked eye that buy signals were being generated (a local maximum on the chart would be a buy signal for the stock market in general). The computer analysis agreed that was the case for the standard ratio (Figure 2) but did not agree with regard to the weighted ratio (Figure 3). Now, with the market having taken a sharp hit on Thursday, both ratios jumped higher again and are on the verge of making a new relative high for this move that began in mid-August. If the ratios do make a new relative high, that will reaffirm the sell signals. In any case, the weighted ratio has remained on a sell signal throughout this month, according to the computer analysis programs.

Market breadth has deteriorated badly. "Stocks only" breadth has been terrible since Labor Day (Sept 5th). NYSE breadth was better than "stocks only" breadth, but it was generally negative, too. Both breadth oscillators are on sell signals, and they are now both in oversold territory. It is going to take several days of positive breadth in order for the "stocks only" breadth oscillator to generate a buy signal. Remember: "Oversold does not mean buy."

Even $VIX may finally be waking up from its persistent slumber. $VIX jumped higher on Thursday and is now in "spiking" mode. The stock market can fall sharply while $VIX is in that mode, but eventually a new "spike peak" buy signal will be generated.

One further observation on the $VIX chart in Figure 4: $VIX has probed down to 13 several times (including about a week ago), but has not been able to fall farther. That represents a level at which "big money" (buyers of $SPX puts) is willing to buy protection. Whether they are correct in needing that protection or not remains to be seen, although it was welcome this week.

In summary, we are not carrying a "core" position as long as $SPX is in the 4330-4540 trading range. But individual indicators have deteriorated as the market has moved lower, generating some sell signals. Oversold conditions may produce buy signals in the coming days, but until they are confirmed, the market is not a "buy" yet.

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

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