In the weeks ahead the major indices will eventually provide investors with more convincing evidence as to the market’s direction.  Technically, it would have bearish implications if any of the major indices dives through a recent chart low.  Hopefully we shall see the indices work on establishing a series of "higher lows".  Meanwhile, we cautiously observe, remaining diligent about preserving capital.   

If you did not note them before, these were the recent low points for the major indices:

Violations of the lows noted would technically be a signal to reduce exposure in equities.  The case that we have not seen an end to the "Bear Market" would be clinched with some compelling proof if we see deterioration below these key technical marks for the major indices.  Violations could be considered good news for investors with an interest in ETFs inversely related to the major market indices – which sometimes are leveraged.  However, short term tactical trades of that sort are not being encouraged at this time.  The idea is simply shared to be clearer about what the weak chart action would be suggesting. Investors who did not get the idea to reduce exposure earlier in 2008 (or since the major averages topped out in October 2007) may not be swift enough to enjoy meaningful success with quick in and out maneuvers in those trading vehicles.  Most should avoid unnecessary activity; hold a high level of sidelined cash, and watch any open positions carefully for any new technical sell signals.

Of course, the bullish notion is supported by the fact that the current rally effort remains valid unless the lows we have talked about are undercut.  Technical strength could also turn the outlook even more bullish, and it would bode even better for the present rally if the indices can rally above their recent chart highs: 

For the major averages to achieve that feat there most likely needs to be a surge of leadership.  However, a lack of strong new leaders showing healthy breakouts with gains backed by heavy volume has been a missing element in recent months.  That is a large reason why clients relying on my team’s direction have not opened many new positions during the latest rally.  At some point, there inevitably will be more evidence to support us moving to a more bullish view and stance.  If the major averages struggle under their downward trend lines, it will be due to a lack of leadership.  Without leadership, the odds suggest that we should keep our cautious stance.  Either the current rally fails, or there should be many healthy leaders coming along in the following days and weeks.  We stand ready to recognize the characteristics of the best buy candidates, and we are ready to have quick reflexes when worthwhile companies cross that important buy point.  Since there are never any guarantees in this business, we watch the market closely.  If the market starts to fail miserably and we see our stocks breaking down, we minimize the damage and protect ourselves from a more devastating loss. 

To really be able to consider a market in "healthy" shape the major averages should be trading above their 200-day moving average (DMA) lines.  Those critical points are still very far off!  That fact makes the current rally similar to the rally that followed the October 2002 lows – when the biggest bear market bottom ever was hit and stocks were “oversold” if ever the term applies.

It will obviously take a lot more time to see the major averages rally above their 200 DMA lines:

To trade above their respective 200 DMA lines from present levels, the Dow Jones Industrial Average needs to rally +7%, the S&P 500 Index needs to rally +5.9%, and the Nasdaq Composite Index needs to rally +1.9%.  The tech-heavy index has the best chance of making it above its long-term average first. That might also provide a reassuring sign that leadership was emerging from the typical areas were investors expect to find leading growth companies.  As opposed to cyclical or commodity-linked action, that leadership from Nasdaq would be a healthy improvement.