Another factor that technicians consider is something called the high-low index. That takes the percentage of stocks hitting new 52-week highs versus the total number of stocks hitting highs and 52-week lows. Right now, that index shows that as of Thursday, some 2% of all U.S. stocks that are hitting either their high or lows are reaching the high end of those ranges.

Technically, anything under 20% demonstrates oversold conditions. So we're at extremely oversold levels at this point.

SPY & DIA Forming Double-Bottoms

It appears both the S&P 500 and the Nasdaq-100 are undergoing a double-bottom formation. That's a very strong technical indictor of impending sharp upturns in the market. For example, take the SPDR S&P 500 ETF (NYSE: SPY). It hit an intraday low of $74.34 per share on Nov. 21, 2008. This morning, we've breached that low.

A double-bottom formation, if it holds up, eventually looks like a "W" on a price chart. That's a technically strong reversal pattern. And again, it's forming in SPY and the Dow Diamonds (NYSE: DIA) right now.

Catalysts For Coming Rally

The market has climbed a wall of worry. But we're entering into a possible period of strength next week. New contributions to 401(k) retirement plans will start filtering into the market starting on Monday, the first business day of March. This could act as a catalyst and it could influence other investors, igniting a move up in markets sometime during the week.

Another key technical indicator is the 200-day moving average. SPY is 31% below that average and DIA is 29% below its 200-day moving average. Historically, those are very wide spread levels from their averages. Eventually, a reversion to the mean should occur with each of these ETFs.

The ideal situation is that Friday ends lower and investors sell off in a panic-driven washout on Monday. That would shake out the nervous Nellies and we could have a 25-30% rally between now and the end of spring.

But let's not get ahead of ourselves. Whether any coming rally—which markets seem to be technically setting up for—lasts is still questionable. After all, fundamentally, stock markets are basically pretty well shot. So you might consider using stop losses with any stock ETF purchases to limit downside risks in this environment. A fairly routine level would be 8-10% below the purchase price to mitigate losses and maximize returns.

Jerry Slusiewicz is president of Pacific Financial Planners in Newport Beach, Calif. He welcomes comments and suggestions for future columns at: This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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