We offered an S&P 500 chart here a while back that was intended to show how a very powerful rally over the next 18 months would not change a long-term picture that remains very bearish to this day. The S&Ps were trading around 900 at the time, but we added 18 bars to the monthly chart in order to help readers visualize a steady, spectacular climb to 1400 by early 2010.  We are much too bearish on the economy to think that such a powerful rally is in the cards. However, "thinking" about this market is not necessarily the best way to understand it, since the uptrend seems to be driven not by rational thinking, but by the wantonly mindless flight of Other People's Money into equity shares. For that reason, we have purged nearly all of the "thinking" from our analysis, the better to focus on the coldly mechanical facts that technical analysis affords.

Which brings us to the chart above. It shows how the S&P 500 Index would look on a weekly chart if it were to fall quite sharply, losing about 25 percent of its value over the next four months. Permabears - and we unapologetically include ourselves in that group -- would probably get pretty excited about this, since it would suggest that stocks were at long last responding to events in the real world -- most particularly to a debt deflation that threatens to wreck capitalism for at least a generation. In purely technical terms, a 25 percent pullback within the massive bear rally would feel right as rain, since it would fully correct the very powerful AB "impulse leg' shown in the chart. That leg surpassed two "external" peaks on the weekly chart without pausing for breath, hinting that no matter how much the S&Ps might correct from these levels, another bull leg is coming. (For the technically minded, let us note that we have altogether ignored the correction labeled XY because it was less than 0.618 of segment k-A.)

A Final, Lethal Rally

We have tacked on to the end of the chart one final, highly lethal bear trap, since that would be a fitting end to the Mother of All Bear Rallies. Once again, this is not exactly what we expect, since we are too bearish to think that a big selloff beginning around now would actually reverse before stocks plunge into the bowels of Hell. Even so, since thinking is not what we do best, we have drawn a chart with hypothetical price bars to remind ourselves that what does not seem logically possible can become quite plausible and even compelling in a purely visual, imagined sense.

Bears and bulls alike therefore have good reasons to be extremely cautious, especially when it looks like they might be getting what they wished for.