The bulls have pushed the markets to the edge of the envelope for the bears. Any sustained move above last week's highs of 29.36 in the Qs and 8831 in the Dow would be cause to exit short positions. However, the 50dema looms just above that level in the Dow and may lead to a reversal on any breakout.
I must say that it is hard to believe in this rally. The intraday pattern suggests that today's high was the top of a countertrend rally against the 12/1 decline. The advance/decline ratio has deteriorated on every advance since it began back on 11/21. The McClellan Oscillator is at an extreme high level associated with tops. If the markets had already broken out, a coincident high reading in the McClellan Oscillator would be bullish, but since they haven't it would normally be bearish. On the other hand the Summation Index is rising and the Options Buyers Sentiment Gauge is at an extreme bearish reading, both of which are bullish.
The bottom line is that should we get a breakout above last week's high next week, I will exiting my index short positions and reversing to go long the Qs for a move to the 50dema. This period reminds me of February 2008. I got chopped up a couple of times then too before the real rally materialized. We can't expect to win every trade. As long as we are trading the trend, we will be rewarded in the long run. For now, the trend is still down, but a reversal could be a hand.