By Lawrence G. McMillan

Last Monday (June 25th) $SPX gapped down below support at 2740, and a rout was on. Within a few hours, $SPX had fallen all the way to the next support level at 2700. The rest of this week has been spent testing that 2700 level, and it has held for the most part. But the breakdown adds a modicum of bearishness to the $SPX chart. There is now resistance at 2740; there is another gap at 2750, and the 20-day moving average is at 2755.

Below 2700, there is potential support at 2680 — the late May lows — but the more intriguing support is the rising 200-day Moving Average, at 2665.

The weighted equity-only put-call ratio (Figure 3) rolled over to a sell signal this week. It is now rising quickly, and as long as that is the case, the sell signal will remain in place. The standard ratio (Figure 2) is not as clear. It has been moving sideways and rising a little, but the computer analysis programs continue to say that it is not a confirmed sell signal.

Market breadth has been in a series of “positive one day, negative the next,” since June 12th. But the negatives have been greater than the positives, and so both breadth oscillators are on sell signals.

Even volatility has weakened, although it’s in a mixed state right now. $VIX climbed above the 15 level, and that alone raises the prospect of an uptrend in $VIX. When volatility is trending higher, that is bad for stocks.

In summary, the bullish case has weakened with the breakdown of the market this week. A rally is now trying to get back to the resistance levels. Perhaps this has only been a widening of the trading range, with 2790 being the high and 2700 being the low. But I think there is more than a small chance that this could develop into something more bearish. So rallies such as today’s quarter-end window-dressing can be used to establish bearish positions.

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

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