Wednesday's turnaround had the hallmarks of an important technical reversal, with some notable exceptions.

The real test begins with today's session, and how it

ends

will be a lot more important than how it starts. A failed rally attempt obviously will be a negative, while an expansion of Wednesday's turnaround -- especially if volume surges -- will be decidedly bullish, at least near term.

Wednesday's market action, a nasty swoon followed by a dramatic rebound, included many characteristics of a classic technical bottom, but failed the volume test. With 1.7 billion shares traded on the

Big Board

and 1.9 billion on the

Nasdaq

, it was strong but not outstanding. Similarly, even at the market's nadir on Wednesday, neither breadth nor downside volume was at the extreme levels commonly seen at major turning points.

What's more, there has not been a series of sessions lately with both 90% downside volume and 90% downside price action. "We've come close a couple times, but no," confirmed Paul Desmond, president of Lowry's Research. "If we were to see a 90-90 downside day, it would probably be confirmation of climactic selling

and would improve the quality of this bottoming pattern we've had here on

Wednesday."

The previous session also showed the importance of understanding technical analysis, at least for short-term movements. The market didn't rally because concerns suddenly evaporated about inflation, oil prices, higher interest rates and/or the morass in Iraq.

More likely, the market rebounded because of the technically significant combination of it being oversold by a variety of measures and the

S&P 500

futures trading down to their 200-day moving average. (To wit, if inflation fears really were a contributor to Wednesday's early weakness, as was widely reported, shouldn't buyers have waited until

after

Thursday's producer price index before pouncing?)

Some important technical levels to watch going forward include 9800 (support) and 10,300 resistance for the

Dow Jones Industrial Average

. Comparable levels are approximately 1060/1120 for the S&P 500 and 1850/1980 for the Nasdaq Composite. Meanwhile, any presumptive near-term bounce remains a trading-range phenomenon until previous highs are exceeded, most notably just above 1160 on the S&P 500.

If Wednesday really marked an important bottom, there should be plenty of time for investors to rebuild positions. Bulls should almost root against a huge upside session Thursday, because that would suggest traders still have a greater fear of missing the next rally rather than getting burned by further weakness. From a contrarian perspective, such a scenario would be negative because it would belie the notion that bearishness has risen to critical levels.

Rising bearishness was reflected by recent spikes in put/call ratios, the one-day Arms Index (which traded as high as 3.70 intraday Wednesday), and the Chicago Board Options Exchange Market Volatility Index, which traded above 20 Wednesday. While that's not a historically high VIX reading, the so-called fear index has risen more than 40% from its intraday (and 52-week) low on April 23.

Anecdotally, there was a lot of angst among traders early Wednesday afternoon, but the lament from the head trader of one mutual fund firm was telling: "We've been putting money to work -- looking for a rally, and we're not getting it," he said. "We're finally getting prices where we feel comfortable

buying, but 10 minutes later, you're down 20 or 30 cents and looking like a knucklehead."

The source, who requested anonymity, went on to say his sense of other mutual funds was that they too have been "building cash, sitting, waiting, trying to catch the bottom."

The very fact that traders are looking for a bottom with the S&P 500 still only about 5% below its 52-week high says something about the still-bullish state of sentiment, doesn't it? Certainly, we're far from any sort of "panic" often seen at major bottoms.

As a corollary to that, Bernie Schaeffer, president of Schaeffer's Investment Research in Cincinnati, recently noted a sharp drop in open interest on exchange-traded funds, or ETFs. Specifically, short interest on the

S&P Depositary Receipts

(SPY) - Get Report

fell 28% in April vs. March, he reported, while short interest fell 24% on both the

Dow Diamonds

(DIA) - Get Report

and

Nasdaq 100 Trust

(QQQ) - Get Report

.

"One of the major sources of potential demand

short-covering has been muted," Schaeffer wrote earlier this week, explaining his switch to a long-term bearish posture from a long-term neutral one.

"This is a market that has had many reasons to stage an impressive rally over the last few months," he continued, citing a short squeeze earlier in the year, heavy inflows into mutual funds and outstanding corporate earnings. "But all these potentially powerful forces have failed to drive stock prices higher. All indications are that major distribution of stock has been taking place from sophisticated investors to unsophisticated investors. And such distribution inevitably occurs at significant market tops."

Yes, while many are talking about bottoms, this column's

"Guru of the Year" for 2003, is talking tops.

Notably, Desmond also was talking tops Wednesday evening, but from a far different perspective. "We have not seen any classic signs of a major market top," he said, adding that some indicators suggest "potentially another year of uptrend."

Still, the rally from March 2003 until mid-January 2004 was unique in its lack of significant corrections, he said, which could lead to a "lengthier-than-normal" correction that "may not be finished" yet.

But even if that's the case, "I don't see any evidence investors should panic-move to highly defensive positions," Desmond concluded. "Keep a positive attitude and be ready to take advantage of the next leg of the advance."

Regardless of who is proven correct, these veteran market-watchers remind us that the real issue is whether the market topped in January -- even if the pertinent near-term question is whether the market bottomed on Wednesday.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

atask@thestreet.com.