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The circumstances Ponyboy’s teacher refers to are the fight and Johnny’s death.
Ponyboy tries to return to school after Johnny’s death. He has missed a lot of school, and had a variety of emotional reactions to the events. He is a mess. His teacher knows that things have been hard for him, but Ponyboy does not take it as sympathy.
You're failing this class right now, but taking into consideration the circumstances, if you come up with a good semester theme, I'll pass you with a C grade." (ch 12)
As we know, Ponyboy does not like pity. He does not like being the center of attention. His reaction to the teacher’s word “circumstances” is “brother, was that ever a way to tell me he knew I was goofing up because I'd been in a lot of trouble.” (ch 12)
Ponyboy’s English teacher feels bad about the fight and Johnny’s death, but Ponyboy interprets it as saying he is in trouble. He has a long way to go in managing and confronting his emotions. His theme, the story we read as The Outsiders, is his way of coming to terms with what happened to him.
The English teacher is trying to show Ponyboy that he is not all alone. There are some people on his side. With everything that happened, people understand him and what he has been through, and sympathize, more than he thinks.
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