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Things have been looking up since the

Bear Stearns


mess, with the major averages moving higher and raising hopes that the worst days of the credit crisis are finally behind us. But the stock market isn't out of the woods just yet, and it will take

a lot more technical rebuilding

to declare a final end to the bear market.

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It's highly positive that we have built a sturdy base off the January low and made progress to the upside in the last five weeks. This is reflected in the market volatility index (VIX), which on Friday dipped under 20 for the first time in 2008. This "fear gauge" points to an easing of anxiety and a willingness of war-weary investors to take on additional risk.

But even though we have bounced firmly off deep lows, the right conditions still aren't in place to ignite a sustained bull run like the one we enjoyed between 2003 and 2007. In fact, there's a body of credible evidence to suggest that the broad market is vulnerable to another decline that drop prices back to, and possibly through, the first-quarter lows.

Let's take a close look at what's missing in this monthlong recovery effort. Hopefully, these absent elements will fall into place in the next few weeks and help nascent bull forces take firm control over this conflicted tape. On the flip side, these critical dimensions need to show up here and now, or else the rally effort could be doomed to failure.

Monday's session was the 22nd trading day in a row of below-average volume on the

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Powershares QQQ Trust

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. This isn't good news, considering the market's dramatic gains over that period. Clearly, this shortfall points to public skepticism about the current uptrend.

There is also a self-limiting mechanic element at work in these limp numbers. Historically, the public deposits more capital into the stock market during the first quarter than at any other time during the year. But in 2008, huge sums flowed out of equities as investors moved money to safer havens during the credit convulsions.

This exodus means that fund managers have less fuel to pump into the tank of this rally, despite improving fundamentals and a greater number of low-risk, high reward opportunities than we've seen in many months. Of course, the only real solution to this dilemma is for the public to fall back in love with stocks and step in with fresh inflows.

There's an old market expression, "When you can't find the volume at current price levels, it will eventually show up much higher or much lower." This wisdom suggests that the public will return to the action at higher levels as aggressive buyers, or at lower levels as aggressive sellers.

Let's hope the buy side of this prophecy works out. At this point, bulls have a slight advantage, but we shouldn't underestimate the level of disgust that Main Street feels for Wall Street after the Bear Stearns bailout. That revulsion might keep investors holding tightly to their speculative capital until at least the presidential elections.

Small-Caps Lagging

Small-cap stocks are still lagging the major averages, despite healthy rotation into other first-quarter laggards. This is a big deal, because buying interest in small-caps points to speculative fervor that supports a long bull market run. Alternatively, selling pressure in these instruments exposes risk aversion, which can spread quickly to other equities.

Admittedly, it's still early in the recovery process, so these high-growth issues could wake up at any time. But prior turnarounds have begun in small-cap stocks and then spread into other instruments, so the failure of this group to attract buying interest right here and right now adds another note of caution to the current uptick.

On the flip side,

Russell-2000 Trust

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technicals have improved marginally in the last week. Accumulation is starting to perk up, with the on-balance volume (OBV) indicator showing a return of mild buying interest. Its current path of travel opens the possibility of a double bottom that would offer solid support to the rally effort.

Watching the 200-Day

One of my longtime market observations is that bulls live above the 200-day moving average, while bears live below it. In other words, buying forces control the ticker tape when the major averages are trading above that long-term line in the sand, and selling forces are in control when they've fallen below it.

All major averages broke 200-day moving average support in late December and early January. In the following month, the 50-day moving averages dropped below the longer-term ones, triggering the classic "death cross" sell signals that are associated with bear markets. These signals are still in place, despite the monthlong rally.

The Powershares QQQ Trust and

Dow Industrials

have rallied just above their 200-day moving averages, while the

S&P 500

and other indices (such as the Russell 2000 noted above) are still trading well below equivalent levels. Although the stronger indices have nosed higher, there still hasn't been a high-volume break of this major resistance.

Sadly, the bear market environment will remain firmly in place until two milestones are achieved. First, all major indices must finally remount 200-day MA resistance, and second, the 50-day MAs must cross back above the 200-day MAs and reinstate the bullish technical outlook. Until then, we need to tread lightly and not get carried away by the rising tape.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.

At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.

Farley is also the author of

The Daily Swing Trade

, a premium product that outlines his charts and analysis. Farley has also been featured in





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. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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