Are market gains short-covering or key reversal?

Market Snapshot for session ending 10-5-11:

Market Overview – What We Know:

• Further gains in major indexes Wednesday moved prices into lower to mid-ranges of resistance stretching up to late August levels (1230.71—S&P 500).
• Trading volume in S&P 500 diminished nearly 20% relative to Tuesday’s levels.
• Upper boundary of 10-Day Price Channel in S&P 500 at 1180.85 (Thursday’s level) is roughly coincident with downtrend (1186.00) stretching back to May high.
• Cumulative Volume moved higher in S&P 500 and S&P Emini futures contract Wednesday, but neither series is positioned to break above August resistance.
• Short-term Momentum remains negative along with both of our proprietary Trading Oscillators, but all are also “Oversold.”
• Intermediate Cycle remains “Oversold.”
• Major Cycle Momentum remains negative in all of major indexes.
• Using daily data, Most Actives Advance/Decline Line (MAAD) was higher again Wednesday, but indicator remains well below trendline resistance. For session 18 issues were positive and 1 negative.
• Daily MAAD remains toward levels not seen since late July 2009 when S&P 500 was toward 990.
• Call/Put Dollar Value Flow Line (CPFL) improved Wednesday with positive ratio of 1.08 to 1.

Market Overview – What We Think:

• More market strength Wednesday has created some doubt in bearish camp to extent many now wonder if new lows were a downside feint at otherwise “Oversold” and positively poised Intermediate Cycle bottom.
• Proof to assertion would demand strength above upper edge of 10-Day Price Channel (1180.85—S&P 500 through Thursday) and downtrend line stretching back to May high (1186—S&P), or buying over past few days would likely turn out to be short-covering in larger negative trend.
• As far as the market making new lows, a similar trending bottom developed in March 2009 after market made a higher low in November 2008. Second low into March with weaker prices was not confirmed by many indicators.
• It remains to be seen if current strength will fade and negative pricing resumes, or if recent lows hold and more basing action leads to Intermediate Cycle rebound. At some point it will become increasingly difficult for short-term trend to remain negative in face of intermediate trend that is “Oversold.”
• Shift to more positive flavor by options players could be an early sign market’s downside bias may be abating.

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