By Lawrence G. McMillan

A week ago Thursday (May 3rd), the market was on its heels as a large day-long sell program had pushed $SPX below the 200- day Moving Average.  A close below that MA would have signaled some dire things for the bulls, but then a reversal rally took hold   and it hasn’t let go yet.  As of yesterday’s close, $SPX had rallied 130 points from those intraday lows.

The rally has been strong not only in terms of price, but in terms of the other indicators that we follow as well.  As a result, most of the bearish arguments have been vanquished — but not all.  We have said all along that we need to see the gap filled at 2750 on the $SPX in order to change its status from “bearish” to something more positive, and that is still the case.

Put-call ratios remain on buy signals.  The equity-only put-call ratios gave buy signals about three weeks ago, and they haven’t wavered since.  The weighted signal came from an extremely high (oversold) level.  The Total put-call ratio has also given a buy signal, and its signal has an upside target of 2770.

Market breadth has been very strong this week.  As a result, both breadth oscillators have canceled out previous sell signals   thus moving to buy signals.  Both are in modestly overbought territory.  As always, we want to see these oscillators get overbought when $SPX is breaking out on the upside.; it is a sign of strength.

Another breadth-related indicator is giving a new sign: the cumulative advance-decline lines for both “stocks only” and NYSE- based data just traded at a new all-time highs yesterday.

Volatility remains a positive indicator for stocks. $VIX has now clearly broken to new lows, diving well below 15 (red line in Figure 4).  That is bullish for stocks, as is the fact that $VIX is in a downtrend (blue line in Figure 4).

In summary, the indicators have all turned bullish, and $SPX has made a positive trend move by closing above the April highs and by breaking through the downtrend line.  This is about as close to a fully bullish signal as one can get, but we have seen this market reverse downward suddenly several times in the last few months, so we are not going to change our intermediate-term outlook unless that gap at 2750 is closed.

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

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