The stock market is in an interesting position right now because there are some potentially bullish patterns on key indices. First, observe the head-and-shoulders bottom on the S&P 500 ETF Trust (SPY). This is a potentially bullish pattern suggesting a sharp rise in stock prices could occur if the SPY moves above the 114 area.

This same pattern also occurs in the NYSE Composite Index ($NYA), and in fact that index is broader and looks more positive, which is a plus.

Turning to some of the small-cap indices, we look at the Russell 2000 Index ETF (IWM). The pattern here is a double bottom, and is also favorable, but not as favorable as a head-and-shoulders bottom. This also suggests upside potential for equities.

The S&P 600 Index Small Cap ($SML) has the same pattern. What is interesting about this is that, since 2009, the smaller indices have been leading the market up, which is what happens at the end of recessions. Now, this may be changing -- we are watching this development carefully at www.theFREDreport.com.

Many market participants have noted that sentiment is bearish on the markets and from a contrarian viewpoint bullish for stock prices. We did a study in our latest Monthly Review that suggests that when Investorâ¿¿s Intelligence (a popular sentiment survey) has 30% or more responders that are bearish on the market in July, the market is actually higher by October. Since the % bears was over 30 in July, this implies strength from here into the October timeframe.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here: Fred Meissner.

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