Equities show more buying power right now that at any time since last summer. Does this uptick mark the end of the bear market or just another false dawn ahead of even lower prices in 2009? While there's no perfect answer that big question, the weekly index charts can help us make informed decisions about this recovery effort.

I'll use exchange-traded funds in this review, rather than the indices, because they give us useful volume information that's missing in the underlying instrument. This is especially important because prior oversold bounces in this bear market printed unusually weak daily volume that indicated eventual failure and a rollover to lower prices.

SPDR Trust
Click here for larger image.
Source: eSignal

The SPDR Trust ( SPY) illustrates the historic decline between October 2007 and November 2008, with the fund bouncing at 2002 support under $80 just two weeks ago. Price action since that time shows a moderate bounce with considerable week-to-week overlap. Notably, the instrument has yet to mount the November swing high at $100.86.

So, for now, S&P 500 price action is still engaged in an active downtrend noted by a continuous series of lower highs and lower lows. This will change when the index finally rallies over the last weekly high. However, the fund also shows a major resistance level between current price and that high, in the form of a declining parallel channel.

The two-month sequence of highs and lows has generated a channel, with resistance near $96.50. It's common for this type of pattern to develop in the latter stages of downtrends. In theory, it's difficult for price to break out of this formation before it grinds out at least three highs and lows. This raises the possibility of another lower low before this bear market finally ends.

Channel resistance corresponds to the 50-day moving average on the daily chart. This convergence adds significance, because traders and institutions use that level for making major decisions. In addition, the S&P 500 will no longer be technically overbought once it gets up that level, so it's set to become a major point of conflict in the developing uptick.

In the meantime, let's sit back and watch channel resistance. A breakout above that level would be bullish and issue buy signals for short-term long-side positions. The trades could work out quite well because they would trigger before price reaches more obvious resistance at the November swing high.

Of course, the flip side is also true. Channel resistance and the 50-day MA will encourage short-sellers to come off the sidelines and establish new positions, in anticipation of a reversal and selloff back through the November low at $74.34. That's why it is so important to remain defensive until the breakout actually takes place, and not jump in too early.

Powershares QQQ Trust
Click here for larger image.
Source: eSignal

The Powershares QQQ Trust ( QQQQ) weekly chart, proxy for the Nasdaq-100 index, shows a pattern that's noticeably similar to that of the SPDR Trust, but small differences between the two instruments add up to a more bearish view. For starters, this fund bounced well above its 2002 support level in November, which is sitting at $19.84.

Long-term index trends often persist until all major averages get to common points of reference. This convergence usually tightens near the ending points of trends, with an outlier index surging higher or lower to fulfill underlying order. With this mind, the bear market might not end until the QQQQ breaks $20 and hits long-term support.

Price structure also warns that the bear market probably isn't over yet. The decline shows two distinct down waves with countertrend rallies starting in March and perhaps November. This suggests we'll see a third and final selling wave that moves along the same vertical trajectory. That event could fulfill the convergence principle.

On the flip side, the fund is also stuck within a channel, with current resistance at $31. Another selloff within this pattern might accomplish the mathematics of a third selloff, even though price rate of change would be less painful than the last two waves. In any case, that decline would also get the job done so we could look forward to better times.

For the shorter term, the rising instrument has already crossed more than 90% of the distance between channel support and resistance. This has skewed reward/risk against new long positions. With the twin barriers of the pattern and the 50-day moving average resistance just above, its time to take profits from the recent buying surge and wait for the next signal.

That will come on a breakout, or rollover, from a 60-minute topping pattern at resistance. Of course, I favor a breakout because they're profitable to trade and will improve technical conditions heading into January. But reality suggests that the uptick will be a tough sell, especially with triple-witching options expiration coming up next week.

In prior years, money managers have used December expiration to lock in yearly performance, in order to avoid volatility during the thin trading conditions between Christmas and New Year's Day. This activity tends to dampen "Santa rally" dynamics and constrict price movement, in both directions, into year's end.


Know What You Own: Other index-based ETFs include the iShares Russell 3000 ( IWV), the Vanguard Total Stock Market ( VTI), the iShares Emerging Market ( EEM), the iShares S&P 600 Value ( IJS) and the iShares Russell 2000 Value ( IWN).


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

At the time of publication, Farley had no positions in securities 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 Barron's, SmartMoney, Tech Week, Active Trader, MoneyCentral, Technical Investor, Bridge Trader and Online Investor. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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