An extremely large rally took place on Wednesday. Was it just an oversold bounce, soon to be forgotten, or is it the real thing? It's too early to say definitively, but right now it has not yet proven itself. The rally was spurred by a deeply oversold condition, by the approach of the end of the quarter ("window dressing"), by the fact that the market bounced right from the areas of the January lows, and -- in the case of $SPX -- it bounced right off the ascending trend line that connects the August and October 2004 bottoms (Figure 1).
Those are positive things, but in reality, the major averages are below their 20- and 50-day moving averages. Often, oversold rallies fizzle out at about the level of the (declining) 20-day moving average. For $SPX, both the 20- and 50-day moving averages are at about 1192; for $OEX, it's about 570. If those indices were to rise above the indicated levels, then that would be a buy signal.
Breadth has been quite positive this week. If advances lead declines over the next two day, that will be a buy signal for breadth.
Equity-only put-call ratios are a bit surprising -- at least the standard ratio is. You may recall that the standard ratio gave a buy signal last week. That fact, coupled with this week's rally, would lead one to suspect that the buy signal was even more entrenched. But such is not the case. In fact, there has been an increase in the put-call ratios this week -- even during and after the rally. Thus, the recent buy signal in the standard ratio has been canceled out (Figure 2). Hence it's back on a sell signal once again. The weighted ratio continues to remain on a sell signal (Figure 3).
Finally, volatility ($VIX) reached levels equal to the January highs when the market was testing the its January lows. That makes sense, although we don't always have such symmetry. In any case, $VIX declined a little when the market rallied, but it is still in an uptrend (see Figure 4). As long as $VIX remains in that uptrend, it is bearish, in my opinion.
Trying to make sense out of all of this, it seems that the best guideline is a rather simple one. We would remain bullish until 1) $SPX closes above 1192, and 2) $VIX closes below 13. If those conditions are met, they will likely also create buy signals in the breadth oscillators as well as the put-call ratios.
