The bulls had just about everything going their way, but they really didn’t do much with it, and now momentum has swung swiftly and strongly in favor of the bears.

SPX Through 2nd July 2009

At this point in time, the $SPX chart still shows major resistance at 950 and major support at 880. We had said before that we thought the bulls would defend the 880 level and they did so strongly — for a while. They bought early, as we thought they might, when the market bottomed at 888 a week ago Monday. Since then $SPX rallied strongly at first, and then weakly, eventually reaching 930. But in just over one full trading day, $SPX is all the way back down to 896. I think that, this time, a full test of 880 is in order.

Put-Call Ratio 2nd July 2009

Weighted Put-Call Ratio

Equity-only put-call ratios have stayed bearish throughout the recent rally. Since they are our most trusted intermediate-term indicator, this is significant.

Market breadth has been the most volatile indicator. Buy signals were issued over a week ago, followed by sell signals this week. The buy signal was a “true” buy signal in that breadth reached oversold levels before the buy signal was issued. Those have been especially strong buy signals this year. To reach that status again would require declines to dominate advances for at least three days, by which time it might be too late — $SPX 880 might be violated by that time.

VIX with Trend Lines

Volatility indices have continued to decline, and thus remain one of the strongest bullish indicators. Even today, with $SPX down sharply, $VIX didn’t rise very far. $VIX won’t turn negative unless it closes above 30. Even then, it could be a false breakout as the probe above 32 was in mid-June (blue line in Figure 4).

In summary, $SPX is still within its wide trading range of 880 to 950. If breakouts occur beyond those prices, they will likely be tradeable.

The broad market broke out to new highs again today, although it struggled to hold those gains by the close. The first part of this ongoing rally was characterized by pretty much straight-up action. Since then there has been a series of breakouts, followed by consolidations and then further breakouts. These are marked on the chart on Figure 1. This stair-step advance has been quite orderly in that each consolidation area has provided support for the next breakout. Thus, the 945-950 area should now be support, followed by previous consolidation tops at 920-930, and then 870-880.

SPX with 200 day Moving Average

Sell signals occurred in the equity-only put-call ratios, but recent action has put those sell signals in doubt. In any case, the weighted ratio seems to be a little less susceptible to these false wiggles, and so perhaps it is the one which should be given the most credence now.

Equity Only Put Call Ratio through 12 June 2009

Weighted Put Call Ratio 12 June 2009

Market breadth has generally been positive, continuously remaining in overbought territory since late May — and generally remaining in overbought territory since mid-March. Such long periods of overbought activity are bullish, in that they signify a strong and wide participation of stocks in the rally.

Volatility indices ($VIX and $VXO) remain bullish also, because they are declining steadily. As long as they remain below their declining trend lines and declining 20-day moving averages, that is bullish for the stock market. A close above 32 by $VIX would be bearish, but that seems quite unlikely at any time soon. $VIX is near 27.50, and the actual 20-day historical volatility — often closely associated with $VIX — is below 25. So there is a downward “pull” on $VIX in that regard.

VIX 12 June 2009

In summary, the outlook is bullish as long as $SPX remains above support.