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By Lawrence G. McMillan

$SPX has staged a rally that began on Tuesday’s opening (August 29th) and has lasted three full days to date. The result was a breakout through the downtrend line that had been in place (see Figure 1), and that has turned the $SPX chart bullish.

On the downside, the first support level is 2440. Tuesday’s rally has also left 2428 as a support area, to go along with 2420, and then the major support area at 2400. A close below 2440 be a enough to negate the current upside breakout, in my opinion.

Equity-only put-call ratios had been on sell signals for a month. However, the standard ratio (Figure 2) has now rolled over to a buy signal. The visual evidence is there, and it is confirmed by the computer analytics that we use to interpret these charts. The weighted ratio is being a bit more stubborn. While it has stopped rising, it hasn’t clearly rolled over and begun to decline like the standard ratio has. Hence the weighted ratio is still on a sell signal.

Market breadth has been fairly strong although not spectacular on this week’s rally. For example, there hasn’t been a “90% up day,” although in fairness, there hasn’t been a single one of those since last November. The breadth oscillators are on buy signals, and we would like to see them get very overbought if this rally continues.

Volatility remains low. $VIX spiked up above 14 on the day ofthe missile launch, but closed way below its highs that day. As long as $VIX continues to close below 13, stocks can rise without much worry.

In summary, the bulls have returned. So, with the put-call ratios turning bullish (or about to), and with $SPX having broken through its downtrend line, there are no remaining negative indicators in our arsenal. Therefore, we are bullish for both the short term and the intermediate-term at this point.

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

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