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By Lawrence G. McMillan

After breaking out over 4170 last week, $SPX wasted little time rising to the 4300+ level and bumping into resistance in the form of the 200-day Moving Average, as well as the downtrend line that defines this bear market. This is going to be a formidable challenge for the bulls. A clear breakout to 4400 or so would be a win for the bulls and would probably dictate a rise to the February and March highs of 4600, and perhaps even an eventual challenge of the previous bull market highs at 4800. However, a failure is certainly possible, so if $SPX closes back below 4170, that would be a big negative for stocks.

Equity-only put-call ratios remain on buy signals. These are not in overbought territory, because they are not in the low regions of their respective charts.

What are overbought, though, are the breadth oscillators. Both have moved into deeply overbought territory, with the "stocks only" oscillator setting a new all-time high last Friday, August 12th. These oscillators can withstand a day or two of negative breadth and still remain on buy signals.

$VIX continues to drop, although it seems reluctant to go below 19 -- as was also the case in April. The trend of $VIX is downward as long as both $VIX and its 20-day Moving Average are below the 200-day MA. That is the trend buy signal marked on the chart in Figure 4. It will remain in place unless $VIX closes back above the 200-day MA, which is currently about 24.50 and still rising slowly.

September is the worst month of the year, on average. Couple this with the fact that the market is running up against resistance, all it would take would be a couple of confirmed sell signals to see another spurt to the downside. For that reason, we are still retaining a "core" bearish attitude as long as that downtrend is still there on the $SPX chart. Yes, we have traded and will continue to trade confirmed buy signals around that, but we are not joining with the growing crowd that thinks the new bull market is here. Maybe. But it has to prove it to me.

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

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