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By Lawrence G. McMillan

The broad stock market has broken out over major resistance at 4170 and should now be ready to challenge the 4300+ level. It is imperative for the bulls that these recent gains be held. That is, if $SPX were to slide back below 4170, that would be modestly negative, and if it fell below 4070, that would be extremely bearish.

The current broad market rally, which began in mid-June has been strong and has been accompanied by buy signals from many of our internal indicators. Those indicators are now getting overbought, but there has not been a confirmed sell signal yet.

Equity-only put-call ratios remain strongly on buy signals, as both ratios are descending at a rapid rate now. Neither ratio is near the bottom of its chart, so neither ratio is overbought yet. There is still a relatively large amount of put buying taking place (as traders and investors are worried about the future), so even though call buying is dominant, the ratios are not at extremely low levels yet.

Market breadth has been one of the strongest of our internal indicators. The buy signals that were generated in mid-July are still in place, and the oscillators are deeply into overbought territory. This is our most overbought indicator, but that is not necessarily a bad thing.

$VIX has continued to decline, and that is generally bullish for stocks. In fact, we have a specific indicator for the trend of $VIX, and it turned bullish on August 3rd. This is an intermediate-term buy signal for the stock market.

In summary, the short-term picture remains bullish as our indicators remain on buy signals. Even so, there is still a downtrend in $SPX, and thus the bear market while perhaps in remission is not over.

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

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