The stock market has not recovered from the negativity surrounding last week's breakdown below what had been a solid support level at $SPX 805-810. Selling picked up after that, culminating with Monday's nasty selloff (a selloff that saw the Dow trade below the 2002 lows, to prices last seen in 1997). $SPX and QQQ are not at new lows, however. In fact, $SPX traded at almost exactly the same price it had in November, thereby creating -- for now -- a nearly perfect double bottom (too perfect?). So that level (740) on $SPX is support. Meanwhile, for the last five trading days, $SPX has probed the 780 area, but has been unable to break out above there. That is particularly frustrating for the bulls since there were signs that the market was extremely oversold, and thus a rally should have been forthcoming. Above 780, there is resistance at 805-820 -- at the old breakdown area and also at the declining 20-day moving average.



The equity-only put-call ratios continue to be out of synch. The standard ratio is on a (weak) sell signal, and the weighted ratio is still belatedly clinging to a buy signal.



Market breadth was terrible during the decline and, by last Monday's close, both was in an extremely oversold condition. Sharp, but short-lived rallies are possible (and likely) during such extreme oversold conditions. That was the major spur behind Tuesday's large rally.



Volatility indices ($VIX and $VXO) were grudgingly working their way higher as the market declined. Then, this past Tuesday, when the sharp, but short-lived oversold rally occurred, $VIX was crushed. It hasn't recovered since. Once again, this appears to be evidence of complacency, as $VIX never really spiked higher as would be the normal case during a sharp decline such as we've had this month. Technically, $VIX is neutral, with support at 38 and resistance at 53. A breakdown below 38 would be clearly bullish.



In summary, the signals are very mixed, but the support at 740 is extremely important. A lot of people are watching it. If it gives way, it seems self-fulfilling that a torrent of selling will sweep the market.

Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.