The last four days have had nice strong rally with two 90% up days.  However, we are still below the down trendlines which keeps us looking at the market in bear mode.  If we step back and look at the big picture on a monthly chart, the SP 500 has broken down from a double top.

Shortly after a breakdown from a double top or head and shoulders top, a stock or market will frequently bounce back up and test the neckline of the top before heading down.  This is what appears to be happening now.   The neckline of this top is somewhere between 768-812 depending on whether you use the intraday price or the close price.  Any failed test of the neckline projects the S&P500 will eventually fall to around 400.  If we look at daily chart we can get a little more information.

We have what appears to be a potential five down and, if so, we appear to be in the fourth wave countertrend.  But also note we area approaching the double top neckline region which also is where the current down trendline is.  As long as we stay below that trendline (780) you have to be thinking bear.  If we break that trendline and get back above the neckline, we have to get more bullish because we may have a good rally for awhile.  However, I am of the opinion we will be heading back down into what could be a very nasty 5th wave down.

We are currently overbought in a number of short term indicators such as the McClellan Oscillator, Swenlin trading oscillator, short term trading oscillator, overbought/oversold oscillator, and the composite santo1 oscillator (shown below) suggesting this short term up move will end shortly.

For the intermediate term, however, there are two studies that are particularly bothering me.  The first is the 10 day CBOE Put/Call ratio.  The ratio is hovering around an area (0.85) that has marked every top in the bear market so far.  Even on the last decline the ratio failed to rise much indicating there is a lot of short bullishness that we have seen the low of this bear market.  It is a rare day when the majority are right.  Also, the worst values of the 10 day CBOE put/call ratio are 10 days ago, meaning every day from now on that the market goes up, the 10 day average will drop sharply.  A few days up and it will probably read the lowest value of the bear market (even now we are matching the readings at the bull market top).  This ratio will usually spike to over 1.2 at a good intermediate low.

The second thing bothering me is the free fall in the mortgage derivatives lately.

http://www.markit.com/information/products/category/indices/abx/history_graphs.html

While everyone is getting excited about a new bull market in the financials, a new tsunami has just rushed in and is rapidly eroding away what foundation the financials have left.

Since this bear market has the appearance of a parabolic decline, the usually outcome is the 5th wave ends up the worst wave down and this is what I see happening.  But caution is warranted because 5th waves are the most unreliable of waves, not only can they be the worst wave they can also truncate and not even hit a new low.  The other thing to what out for is the current fourth wave may trace out a triangle instead of an zigzag which would mean a lot of chop coming up before we drop.