By Lawrence G. McMillan
The market has exploded to the upside this week. Some overbought conditions are beginning to appear, but all the indicators are on buy signals right now.
The move above 1950 completed a "W" bottoming formation on the $SPX chart, very similar to the one that existed last October. It should now be able o advance to the downtrend line of this bear market.
Equity-only put-call ratios continue to be bullish. They are declining from lofty (oversold) levels and are solidly on buy signals.
Market breadth has been spectacular, and the oscillators remain on buy signals. In fact, the "stocks only" breadth oscillator now stands at the highest reading in its history!
Volatility indices and futures have declined as the market has advanced, which is natural. That is bullish as well.
In summary, we expect this rally to continue for the short term. There could be a sharp, but short-lived correction to alleviate what is now a very overbought breadth condition, but we would expect this rally to test the bear market downtrend line. What happens after that remains to be seen, of course, but we continue to view the longer-term outlook as bearish as long as that downtrend line is intact.
This Market Commentary is an abbreviated version of the commentary featured in The Option Strategist Newsletter.
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