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By Lawrence G. McMillan

Stocks backed off a little this week most of it on just one day which was a rare interruption of the oversold rally. The pullback left a minor resistance point at 2675 on the $SPX chart. But there is plenty of room between there and the major resistance at 2800-2820. As long as the next local high is below 2800, the $SPX chart will still be bearish. That is, there will still be a pattern of lower highs and lower lows, occurring beneath a declining 200-day Moving Average which is our definition of a bear market.

Equity-only put-call remain on buy signals, and their ratios are now plummeting as some large numbers are coming off from 21 days ago. These buy signals will remain in effect as long as the ratios continue to decline, and considering that they are still rather high on their charts, there is a considerable amount of room for them to continue to decline.

Market breadth has been extremely strong, and that is a positive sign for stocks. The rally can continue as long as the breadth oscillators remain in strongly positive territory.

Volatility has risen this week, continuing to show that traders are leery of another market decline. As a market indicator, it's still a negative that the trend of $VIX is higher. The 200-day Moving Average of $VIX is shown in Figure 4. It is still generally rising, and so that is a negative for stocks.

In summary, many of our indicators are still on buy signals. So we continue to feel that one should remain long for the short-term, rolling calls up to higher strikes to remove credits where appropriate and/or setting trailing stops as the rally progresses. Eventually, sell signals will emerge, and we will see then whether a bear market resumes or not. As long as $SPX is below 2800 and its 200-day Moving Average is declining, the chances of the resumption of the bear market loom large.

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

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