Today the stock market started another rally. The question is, will this rally hold? We have believed from the beginning of this decline that this fall has only been a correction in a larger bull market. If this rally fails, our view will most likely prove incorrect. Tonight we will point out the levels we believe we need to see on the NASDAQ Composite, S&P 500, and Russell 2000 to know for sure that the correction is over.

You can see from the first chart of the NASDAQ Composite that we have been in two different trend channels since the decline starting in May. The first channel is shown with the color orange and was much more aggressive than the current channel, shown in blue. This suggests that downside momentum is slowing. Even though it is not shown on our charts tonight, the RSI indicator is showing powerful divergences on all of the indices we follow, suggesting that momentum has slowed to the point of a reversal. Yesterday was also an outside day for the NASDAQ and even more importantly, the open and close matched on the upper end of the day with a very long tail that created a low for this rally. This is also very bullish. We have indicated a horizontal resistance line on the chart, which if passed should suggest that the correction is indeed over.

The next chart is of the S&P 500. We have also shown two trend channels on this index. The second channel is a symmetrical triangle formation. This shows that the downside momentum has been halted (at least for now) and that loss of momentum is quite bullish, as mentioned in the previous paragraph. You can also notice the 50 and 200 day moving averages on this chart. If the S&P 500 is able to break above these averages, the downtrend line from the symmetrical triangle, and the 1280 area, the index should push to 2006 highs at a minimum.

The next chart is of the Russell 2000. This chart looks very similar to the chart of the S&P 500. The Russell 2000 had an outside day yesterday, just like the NASDAQ Composite. Downside momentum has clearly slowed in the Russell 2000 as well.  A break above of the two moving averages (50 and 200), the downtrend line from the symmetrical triangle, and the 730 area will suggest that the correction is over and that the next major stop will be in the 780+ area.

One possible criticism of the market rallying powerfully from here is that the sentiment indicators are much less bearish than they were a month ago.  Often peaks in sentiment and many technical indicators precede tops and bottoms. Therefore, the fact that sentiment is less bearish is not necessarily a problem. Also, if you look at a 50 day moving average of the total put/call ratio (chart #4) you will see that we are at all time highs. In our opinion there is plenty of money on the sidelines or short to propel a poweful rally.