A short-term trade is opening up in the index ETFs, and the next few sessions will be crucial. So whether you play the Spyders ( SPY) or the more active double and triple or sector ETFs like the ProShares Ultra S&P 500 ( SSO) and the ProShares Ultra Short S&P 500 ( SDS), a move seems to be brewing, and a trade is about to materialize.

There are two ways to view the recent decline in the stock market. Either this is the continuation of the bear market or the makings of a new bull market.

Let's lay out the case for both scenarios from a technical standpoint. The stock market's biggest percentage rallies were bear market rallies followed by even lower lows. The following widely published chart is very powerful and scary:

Bear Market Rallies
CQG, Inc.

The latest S&P 500 move from the March lows from 666 to an intraday high of 956 represents a 43% move that is very reminiscent of the market rallies from 1929 to 1932.

Many analysts who have been warning of just such a scenario have much fundamental support for their opinions. Whether their opinions prove correct or not, it seems the market has reached a critical point in the last two days, where the action of the next several days will determine whether we will be looking at a replay of the action we saw in 1931.

Take a look at this chart that I prepared with my own favorite technical indicators. Here's a daily S&P chart with the Bollinger bands and stochastic indicators overlaid.

Daily S&P
Daniel Dicker

We see that the downswing bars have come low enough to touch the bottom line of the lower Bollinger, in red.

In bull markets, we would expect a fairly quick bounce off of a touch of this line while in bear markets, you will see more frequent touches and some deeper penetrations of this lower barrier.

Moreover, you will notice in a full-scale bear market that the bars seem to "ride" the lower barrier of the Bollinger band on its way down as can be seen in the period from August to September 2008 on this chart and again from January through March 2009. The next few sessions should tell us which one of these we're more likely to get.

Also, you'll notice the stochastic readings at the bottom of the chart.

Overbought readings through much of the first two weeks of this month were met by the "expected" selloff we have seen in the last six or seven sessions.

But now, the indicator has moved into oversold territory. Again, in bull markets, we would hope for and expect a fairly quick and significant bounce upwards from these levels, while in bear markets the oversold indicators get mostly "ignored" by the market as it moves only slightly higher in preparation for further losses. As with the Bollinger bands, we are at a level at which the next several sessions should tell much of the tale.

From my trader's perch, I am watching the action of the next several days very carefully. I haven't much liked the "tone" of the action I've seen and the kick upwards today did not seem very significant to me -- I am not sure whether there is strong dip buying going on here or whether we are gathering momentum for a further leg down.

Despite my guardedness, I still have been selectively buying some stocks over the last two sessions at prices I think represent excellent values. But as a trader, I am ready to run for the hills based on the action of the next several days.

It would take one or two more down moves in the nature of Tuesday's action of about 20 to 30 S&P points for me to likely to bail on some stocks. That's because I would be expecting a further leg down on which I could repurchase shares at lower prices.

Keep an eye on the action carefully for the rest of the week. I will be.
Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.