The strong July rally has run into stiff resistance. It is now important to distinguish between a possible short-term overbought correction and an intermediate-term sell signal.

$SPX is the key indicator at this time. It hasn't been able to get through resistance at 1120, and is now undergoing an overbought correction. However, if it falls below 1087, that would probably indicate that this most recent breakout was false, too.





Equity only put-call ratios remain bullish.




Market breadth oscillators had become extremely overbought earlier this week, at about the same time that $SPX first reached the 1120 level. That overbought condition was one of the major impediments to moving higher immediately.




Volatility indices ($VIX and $VXO) remain in downtrends, and that is bullish for the intermediate-term.




In summary, the market is in the midst of an overbought correction. The market seems to be handling it well so far, but that would change if $SPX closed below 1087.

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.