The bottom is in, but is the rally on?

Bears got a shot on foot by the extreme fear caused by the collapse of Bear Stearns, while bulls were embolden by Fed’s rapid-fire market-saving maneuvers. The results are the first solid up week in 5 weeks with multiple and ultimately successful test of the Jan’08 bottom.

On the weekly charts: for all major indices, the negative momentum extended its receding pattern to 8th week; candles in near Evening Star formations; nascent oversold-rebound signs; MAs still in solid down-trend formation.
On the daily charts: for all major indices, the momentum finally turned to the positive side; overall candle formations in recent days bullish; solid oversold-rebound signs; short-term MAs direction turning flat/up; DOW closed above MA50 twice this week and for the first time since end of last year.

Thoughts and observations about the current market conditions and near-term outlook:

1. With the Jan’08 bottom survived multiple tests in the past two weeks, the heartened bulls will try to mount a rally from here. If such rally gains traction early next week, I suspect that the bears might inadvertently fuel the rally since the short interests are at multi-month highs.
2. The market is still in a confirmed down trend, to seriously challenge that, bulls have to at least push the major indices above their February highs (SP500 at 1388, DOW at 12757, NASDAQ at 2376).
3. This week’s rally was mostly fueled by the ferocious recovery in the bank/brokerage sector and US$, but their V-shape bottoms are likely to be retested in coming days/weeks.
4. Fed gambles big with its all-out efforts to save the market. By throwing its balance sheet into the thick of the credit mess, Fed’s risks would be heightened if the housing market continues to slide in coming months, which would have grave implications. Such fact implies that Fed would be even more resourceful and desperate to defend the market in the coming weeks, and for bears, that means pushing too hard as the market approaches the bottom could be suicidal.
5. While the possibility of the market trending up in coming days is growing, I suspect this counter-trend rally might be used as selling opportunity. Already, there are some evidences of negative money flow and the big boys might be selling into the strength during the latest rally.
Will post the weekly calls tomorrow.