We remain bullish as long as $SPX remains above 1395-1400 level

By Lawrence G. McMillan

Tuesday's action started out with a morning rally, and then spent the rest of the day giving a lot of it back.  Overnight, though, S&P futures rose strongly, exceeding Tuesday's highs.  They have given back some of those gains, but S&P futures are up 5 points in Globex trading tonight.  There is now tentative support at 1430 – the lows of the last two days.  Below there, the entire area between 1400-1420, where the market spend most of August, is support.

Equity-only put-call ratios maintained their recent inclinations: the standard ratio remains on a buy signal as it continues to drop lower day by day, but the weighted ratio is now rising and is thus on a sell signal.

Breadth was positive again, so both breadth oscillators remain on buy signals, in moderately overbought territory.

Volatility indices ($VIX and $VXO) didn't fall much when the market rallied yesterday. $VIX futures lost some ground, though.  Clearly, there is still demand for September options (which affects only $VIX).  The "protection trade" is likely still taking place, although with less urgency than before.  Perhaps those traders who bought so much volatility protection are feeling the sting of losses on that side of the trade.

In summary, we remain bullish as long as $SPX can hold above support levels – primarily 1395-1400.  Overbought corrections are still possible, although they haven't amounted to much in recent weeks

This market commentary was taken from this morning's edition of The Daily Strategist Newsletter.