By Lawrence G. McMillan

A struggle is taking place just above 3900 between the bulls and the bears. The bulls engineered an upside breakout above that level last week and had their sights set on a test of the 200-day Moving Average and the bear market downtrend line (both just below 4100). However, the bears struck back before those targets could be reached and forced a test of support at 3900, which has held so far. A close below 3900 would be negative, and could lead to further declines, testing support at 3700 and then at the yearly low of 3500.

The bear market is still in place as long as that upper downtrend line (see Figure 1) remains unbroken. Even if $SPX should break through the downtrend line, that would not necessarily mean that the bear market is over. It would probably take $SPX moving to new all-time highs to convince me that this bear market is over.

Equity-only put-call ratios remain on buy signals, as they have made new relative lows on several days recently. The CBOE Equity-only put-call ratio remains on a buy signal as well.

Breadth has struggled this week, and the breadth oscillators have succumbed to sell signals once again. This is the first of our internal indicators to turn bearish, so this could be significant.

$VIX has continued to decline, for the most part, and that is generally positive for the stock market. The “spike peak” trading system exited a profitable trade earlier this week. So, there is no longer a “spike peak” buy signal at work. However, with $VIX and its 20-day Moving Average both being below the 200-day Moving Average, that is a trend of $VIX buy signal.

In summary, the bears are not done, as indicated by the continuing downtrend on the $SPX chart. They have attempted to suppress every rally this week. As a result, we are maintaining a “core” bearish position, but will continue to trade confirmed signals around that “core” position.

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

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