For the last few days, investors have been treated to something they were used to seeing way back in, oh, January: a rally. And not just a one-day rally, but a rally that shows the

Dow Jones Industrial Average breaking out of its recent trading range and the

Nasdaq Composite Index grasping at levels not witnessed since mid-April.

Obviously, strategists on the long side like the bounce they're witnessing now, but a few months of failed upswings and poor technical action have left people feeling gun-shy. Also, the strong earnings season should buoy the market during the next few weeks, but uncertainty about the future has people hesitant to declare this the next leg up in the bull market.

"We're moving to the upper bounds of the range on optimism that the

Fed is through, but if we get a bad month of numbers, we'll visit the bottom end," says Richard Cripps, chief market strategist at

Legg Mason

in Baltimore. "I'd get in here, but you shouldn't use all your firepower."

Getting Technical

From a technical standpoint, the technicians are happier than they've been in a long time. After months of trading in an increasingly tight range, bounded by expectations of tighter monetary policy, for the first time in months the Dow is threatening to break out from the iron bonds of the massive selloff and correction in March and April.

Since it first sold off, the Dow has made five attempts to rally, notes Richard Dickson, technical analyst at

Scott & Stringfellow

in Richmond, Va. Each time, it's managed to move above its 200-day moving average, but the rally was thwarted every time. In each instance, the rally ended at a lower level than did the previous rally, frustrating people who, without fail, want to know what the future holds. A trading range indicates nothing but aggravation.

"It would represent the end of that coil pattern, where it gets smaller and smaller and smaller," Dickson says. "If we do it on nice breadth -- and it doesn't have to be 2-to-1

advancers to decliners -- that would be positive, too." Advancers led decliners today by 17 to 11 on the

New York Stock Exchange and by 5 to 3 on the

Nasdaq Stock Market

.

Break on Through?
Dow Jones Industrial Average, three months

To break that pattern, the Dow would have to reach its early June level of 10,850. It came within 16 points of it of today before retreating to close at 10,783.76, up 56.57.

"We're nudging out of the top of these ranges, and that's positive, but I don't think we're yet to the point where it's been a decisive breakout," says Mike Hurley, technical analyst at

E*Offering

.

Fundamentally Speaking

The impetus for a decisive breakout may have nothing to do with technical analysis. It likely will be driven by the market's perception of future growth in the economy and the interest-rate environment, which remains unsettled.

What's taken the edge out of the market in recent days is a perception that labor markets are loosening up (thanks to a soft June

employment report

) and that the Federal Reserve is at or near the end of its current spate of interest-rate hikes. The bond markets have rallied strongly in recent weeks, especially short-term rates, and that's good for companies in need of short-term funding.

In addition, preannouncement season, when companies prostrate themselves before investors, was predictably a bit of a downer. Now that earnings season has truly arrived, and top-tier companies are starting to report strong earnings, that should further support the rally that began last week.

'I'd get in here, but you shouldn't use all your firepower,' says Legg Mason's Richard Cripps

Current earnings won't mean diddly if the market's perception of the future changes.

Already strategists acknowledge that year-over-year earnings comparisons are going to become difficult in the third and fourth quarters, because the market was uniformly strong at this time last year. Acknowledging that, the market still has a chance to advance slowly out of this range if the recent trend of declining interest rates continues, and if the Fed's attempts at engineering a slowdown are successful. Right now, that's what the market is guessing will happen.

"If it's a contest between earnings growth and interest rates, interest rates are more important," says Cripps. "Earnings will slow, but if it comes with lower interest rates, that means better valuations, and we can start to focus on growth again."

But a few pieces of data showing increased inflation, and lousy growth, will have the market reverting to its June pattern -- protecting itself with defensive stocks such as drugs, and growth stocks less tied to the economy's ups and downs, such as technology.

And it all starts with Friday's

Producer Price Index

report.