Until Wednesday we were saying that the stock market was “very technical,” meaning that the use of technical analysis had been extremely productive. All of the signals told us that we were in a bear market. But nothing is that easy, and three successive days of triple-digit gains on the Dow Jones Industrial Average has led me to restudy the situation. What has changed?

One thing that hasn’t changed is the market’s obsession with news from Europe. And the news that moved the market yesterday again focused on foreign banks’ efforts to address the continent’s debt crises. In the United States, the weekly initial jobless claims rose slightly but had little impact on stocks. (Find out how to capitalize on the latest headlines.)

It is the news from Europe that is my first concern: “President Jean-Claude Trichet, chairing his final press conference at the end of eight years at the helm of the ECB, said the bank would restart its buying of covered bank bonds in November and would hold two separate tenders of year-long refinancing to euro-zone banks,” according to The Wall Street Journal.

This method has not been used since the Lehman crisis. It isEurope’s version of QE2 and it could inject capital into our markets. It wouldn’t have the same impact on us as QE2, but it could create demand for equities.

Before I discuss other concerns, I want to make clear my worry over bear market rallies. Our readers will remember that prior to Tuesday’s massive reversal, I repeatedly warned that bear market rallies can be quick and dangerous to short sellers. Rallies begin after making a new low, often spike, and recover with a vengeance, like the spring 2008 rally that ran for over 14%. At that time, a non-confirmation of the Relative Strength Index (RSI) should have alerted everyone to the possibility that a rally could occur.

Now notice that a similar non-confirmation exists on every major indices’ RSI and MACD. Finally, every day since Tuesday has ended with the close at or very close to the high of the day — a mark of late institutional buying.

Perhaps I’m overly cautious and the rally will falter where we expect, either at the midpoint of 1,170, the 20-day moving average at 1,163, or the 50-day at 1,181. But it could continue north to the neckline at 1,260, and that would be more than 17% above Tuesday’s low.

I believe that the clue to the market’s direction is in the movement and/or penetration of the 50-day moving average. There are three possibilities:

1. If we reverse down from the 50-day, look for another quick sell-off.

2. But if the market closes above it, a quick run to the neckline (1,260,) is likely. 

3. The other possibility is that the market could hesitate and trade sideways, which could result in a curl of the line upward, and that’s not good either since it indicates that pervasive and committed buyers are present.

Perhaps my concerns are “over the top,” but you should be aware of the dangers that lurk while the bear is in charge. It is time to watch and wait for the bear’s next move.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.