The Option Strategist Weekly Updater

December 23, 2005

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http://www.optionstrategist.com/offers/strategist.htm
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To receive the To receive the complete commentary plus reccomendations visit here:
http://www.optionstrategist.com/offers/strategist.htm
Note: Use the following link to view this week's charts:
http://www.optionstrategist.co
m/products/advisories/hotline/charts.asp


We have now entered the time frame of the 'Santa Claus' rally -- the last five trading days of one year and the first two days of the next. This will likely keep the market buoyed for the rest of this year. However, underlying this seasonal rally is a deteriorating technical condition that will likely lead to sell signals in the new year. Such sell signals have not been confirmed yet (for $SPX), so one must be patient and wait for them.

$SPX has held above the 1250 support level (Figure 1). This is perhaps the most important single fact that can be stated about the current state of the market. As long as that support holds, there will be no serious decline (unless it comes from a much higher level at a later time). So, if this sideways movement continues long enough for the other technical indicators to regenerate themselves, then perhaps a further rally could occur. However, what is most pressing right now is that 1250 level. If it gives way, much lower prices could result.

The equity-only put-call ratios measure the option activity of all stock options, but its signals are most apropos to the state of the big-cap, broad market. The weighted ratio gave a confirmed sell signal this week (Figure 3). The companion, standard, put-call ratio (Figure 2) is very near to a sell signal as well, but our computer models have not yet confirmed it. Hence, one is bearish and the other is nearly so.

Finally, volatility indices ($VIX and $VXO) are remaining bullish in that they are at extremely low levels (Figure 4). Eventually, a low $VIX can lead to trouble, but that's only after it begins to trend higher (something that appeared to be happening a couple of weeks ago, but did not follow through). In general, $VIX below 12 can be considered bullish or, at worst, neutral.

In summary, we do not have a preponderance of sell signals for $SPX, nor do we have a breakdown below 1250. Without those, one cannot be bearish on the index. However, the deterioration of the indicators makes it look like we are very late in the bullish cycle