The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, April 20th, 2009.

That's what the stock market faces this coming week with technicals now sufficiently overbought to allow for a true test of the trend. Those who do not study history or cycles are interested to find out the nature of the beast. They are asking themselves, 'is this a new bull market?' Based on the way open interest put / call ratios of the major US indices are climbing higher, where I will be showing you updated post-expiry pictures later this week to confirm this thinking, even if the put buying were primarily attributable to hedging, as it stands right now the sentiment related verdict is one of skepticism buy and large, which of course provides the 'wall of worry' for stocks to climb, as described in detail last week. That being said, and to answer the question posed above then, based on this understanding, which has proven most reliable in predicting future trends, odds favor more of a cyclical variety rally in stocks (technical in nature), where best-case scenario, stocks could continue rising until fall if a full fledged seasonal inversion is traced out.

For those of you who do not know, the term 'seasonal inversion' refers to the phenomenon of a market acting opposite to the way they customarily do during a typical annual cycle, where normally for example, from a seasonal perspective stocks have a tendency to rally from a low in fall to a high in spring, and visa versa. Of course this year, due to the high degree cycle event we are now working through (Grand Super-Cycle Degree at a minimum), which is a product of collapsing US Dollar hegemony, phony derivatives, and credit (the chief exports of America), stocks blew right through their normal strong period with further weakness, not bottoming until early March, some six-weeks ago now. So you see, this is why there is the potential for a seasonal inversion this year, because stocks fell hard for a long period of time, and now need to work off this extremely oversold condition.

And while one might argued that because of the Degree of the larger event (see attached above), with collapsing earnings / incomes and contracting liquidity centerpiece, stocks could still succumb to seasonal forces (the economy and trading normally slow through summer), it should be recognized that all of these factors still allow for a larger correction higher before secular forces take hold once again, with government liquidity measures and sentiment the key factors in driving a more substantial counter-trend rally. This means that although things should slowdown this summer on the consumer side of the ledger, like they normally do, because enough participants in what has become a very mature speculative investment community now realize this matters in the annual trade pattern, unwittingly, they will increasingly bet on a negative outcome running into fall, which of course should have the opposite effect on actual market direction. We've talked about this many times before. This is the precondition for stocks to climb the proverbial 'wall of worry'.

So, as long as speculators / hedgers continue to act in a predictable manner, growing increasingly bearish on prospects for stocks as summer / fall approach, past short-term corrections and an all-out failure on the part of master planners to maintain adequate liquidity, the intermediate-term trend should remain up into this period. And naturally the good thing about our model is we won't have to guess about exactly how long the present rally sequence will last because our sentiment studies will tell us when to abandon ship with respect to maintaining a positive slant in our portfolios. This is a luxury many do not have, forced to speculate on future outcomes. We of course endeavor to remove as much of the speculation from the formula as possible by dismissing irrelevant factors / data quickly, and following a proven model. Those of you who have been with us for some time are aware of our track record in calling the larger turns across the stock, commodity, and fixed income markets.

Along these lines then, and in terms of monitoring process in this regard, the question now begs, 'where are we at the moment?' The reason I bring this is because we have had some inquiries about how our views could potentially conflict with the apparent minor degree Martin Armstrong Pi Cycle turn date that is upon us at present, where whatever was trending higher in cyclical fashion should turn lower in a perfect world. You will remember me discussing this a few weeks back, where I qualified my thoughts on this subject, which remain unchanged. The basic understanding is that because financials blew through the previous turn date that was suppose to mark a corrective period higher, and the fact the decline lasted right into the present turn time window (creating a timing related inversion if you will), based on the same logic calling for a seasonal inversion, as defined above, odds favor an inversion here too, where based on Armstrong's far reaching influence within the speculative community, many will bet negatively on stocks moving forward, aiding the counter-trend rally higher.

You see, not only will semi-informed speculators believe stocks will decline into summer / fall from a seasonal perspective, but more, with Armstrong's followers, who are growing in leaps and bounds, now thinking stocks should turn lower also, this can only help to foster more bearish sentiment, which of course would work to cause an opposite outcome. And while this might take weakness in the near term to push some people over the edge in this regard, which is expected on our part with the influence of the next options cycle at its least next week (the influence of a new monthly options cycle is weakest right after the expiry of the previous one), such an occurrence could not have been timed better in terms of maintaining sufficient negative sentiment to keep the intermediate-term trend in tact. At least that's what needs to happen in order for the rally to be extended further in terms of ascending to higher highs. It needs a wall of worry to climb or it will collapse no matter how short the present sequence.

Remember, sentiment must remain increasingly bearish as process unfolds, because actual real world constraints are in fact getting worse, meaning the market mechanism (the perpetual short squeeze) will need more and more energy to feed off in order to spur higher trajectories. If this does not occur, then stocks could essentially go sideways for a period of time while they trace out flatter A - B - C corrections in the indexes, unlike what we had envisioned for the S&P 500 (SPX) last week. For now it's assumed a higher high for the minor degree C wave is still in the cards, however nothing can be guaranteed in this regard, at least not in terms of any appreciable degree. So, as is suggested by mark Lundeen's 'Bear's Eye View Chart', which is the first chart attached here, in terms of magnitude, it's quite possible the rally in stocks has already reached its limit, and that any strength later on would be nothing more than testing, even if prices were to push marginally higher in the process for a brief time. (i.,e. a sloppy test.)

So, that's where we are right now, we at the point where the market is deciding whether the extension of the present sequence will mirror that of the 1929 crash pattern, as per the Bear's Eye View Chart attached above, or that of the1937 / 1938 sequence, as can be seen here via analog based comparisons. Further to this, you might find it interesting to note we can provide empirical evidence supportive of both cases, with the post bubble pattern in the Nikki attached directly above pointing to higher prices promptly, and the chart below suggestive this is about the best we should expect, given some variation of an A - B - C correction corrective pattern still likely needs to be traced out. You will remember the idea behind the foreign market ratio plots we run against Dow is to monitor another reliable measure sentiment that not many others follow, which is what keeps this measurement series relevant, the fact other speculators are not acting on this data. Here, if the RSI test were to fail, meaning values could conceivably plunge back down to historical lows, although prices would not likely go anywhere near the 2008 highs, never the less they would go higher, which would trigger a repeat of the 1937 / 1938 sequence. (See Figure 1)

Figure 1

In terms of the above, I am using the Dow / TSE (Toronto Stock Exchange) Ratio as centerpiece because it has been the most reliable indicator in measuring the appetite for risk amongst speculators, where like the ratio, it wouldn't take much to get them back into a full fledged mania once again with the indicated test failure above possible. (i.e. remember, the Dow is still considered the safest stock index in the world, and commodity speculation the last 'safe' bastion of such activity.) Of course if the test holds, then all bets in this respect are off, and stocks could continue down the slippery slope directly, as per the 1929 sequence. And it's important to note either scenario is possible at this point. This is why it's so important to monitor all of our reliable sentiment measures closely right now, where we will be particularly interested in how the post expiry US index put / call ratios turn out this time around. Here, if they remain high and appear to in fact be trending higher, then the case for continued squeezing remains strong, and one should be more open to the 1937 / 1938 parallel being maintained. Such an outcome would increase this probability considerably, making it very important, which is why we will be back to you on Wednesday with an update in this regard.

On the other hand however, and in framing things in terms of the SPX due the broader nature of this measure, to be fair to the bears, and although I would prefer to see the rally extend over 900 in an attempt to make a better test (we should get this later on no matter what), it should be remembered that the all important (if not the most important Fibonacci number within this context) 233-month exponential moving average (EMA) has been penetrated to the downside decidedly, and that the present bounce in stocks may just be a test of this break. This observation supports the more bearish case naturally, that of the 1929 sequence taking precedence. What's more, it should also be pointed out that even if this was to prove untrue, and stocks were to rally longer (notice I say 'longer' here as there is no guarantee stocks will rally until summer / fall in any event), it should be pointed out that from a conservative technical perspective, that best case scenario, aggressive traders should not be targeting a move much above the 200-month simple moving average (MA) anyway, which only puts pricing a paltry 50 to 100 points above a more bearish target range between 900 and 950. (See Figure 2)

Figure 2

Thus, one must ask yourself whether taking extraordinary risks in equities at this time is worth it or not. And of course the answer for all but loose-minded speculators should be 'no' - based on the evidence. Moreover, and just to be clear, with the still oversold nature of the chart directly above suggestive that from a 'common sense' point of view somebody does not need the most vivid imagination in the world in order to envision a more substantial rally from current levels, at the same time, it must be remembered we are in extraordinary times, and because of this subject to extraordinary conditions. And we don't need to travel far in order to picture exactly where we are in these terms, where once the diamond in the Rate Of Change (ROC) indicator found in Figure 1 breaks out to the upside, and there is little doubt that is the strongest probability from a technical perspective, that all hell is going to break loose in equities, the global economy, and monetary systems. Or in other words, it's going to finally hit the fan once the speculators run out of places to run. Such an event should of course be confirmed with a break in gold above $1,000.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

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Good investing all.