Market X-Rays: All the Symptoms of Nearing a Bottom

My indicators on the major indices have given off a solid short-term buy signal. My intermediate indicators are still negative, but current conditions continue to signal a high probability of further upside. The key now will be for the market to confirm that our indicators are correct. This is often the mistake that many market analysts make -- they trade strictly off of fundamentals, or economic conditions, or technical indicators, and they leave out the confirmation of market action. Until that happens, nothing is confirmed.

All of the indices are forming a technical pattern called a symmetrical triangle. This formation is normally positive in an uptrend and signals higher prices ahead. However, any downtrend triangle is usually bearish. That is why we must make sure that the market confirms our other indicators before we can be sure that the short to intermediate term is in the process of changing.

S&P 500

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Source: TC2000

PowerShares QQQ Trust (QQQQ)

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Source: TC2000

Besides my sentiment indicators, you can see from the charts of the S&P 500 and PowerShares QQQ Trust (QQQQ Quote) that my stochastic indicators turned positive yesterday, and the MACD is ascending very quickly and also looks like it is about ready to turn positive. The confirmation will come from an upside breakout from the triangle.

A downside breakout in any of these indices would immediately prompt me to move back to cash.

iShares Russell 2000 ETF (IWM)

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Source: TC2000

The Russell 2000 index has not yet given a short-term buy signal, but it certainly looks like it is close to producing it. Again, make sure you have the confirmation of an upside breakout before you increase your enthusiasm.

Remember to keep close protective stops on all positions in case today's selling accelerates.

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Finally, I want to follow up on my buy recommendations on inverse ETFs in my column way back on Jan. 11 of this year.

With the current short-term buy signals that my indicators that are giving off, the opposite is occurring in the inverse exchange-traded funds that I recommended in January. With my indicators turning negative on Short Dow30 ProShares (DOG Quote), Short S&P500 ProShares (SH Quote) and Short QQQ ProShares (PSQ Quote) and current gains of about 30% in these funds since I recommended then, I would personally start taking most of the profits with a close trailing stop on the remainder of your positions.

This was originally published on RealMoney on Oct. 21, 2008. For more information about subscribing to RealMoney, please click here.