"A sharp, but short-lived rally is occurring, but the intermediate term is bearish."

Ironically, the above comment is the same one we used three weeks ago.  The market was more oversold this time than it was then, so perhaps the current rally will last longer than the 3-day one we saw a few weeks ago.  The overriding picture is still bearish, though, as markets that have been this deeply wounded do not just turn around and go straight up.

From a bullish perspective, the best that can be hoped for is that this rally is strong enough to build upon when the inevitable retest of this week's lows occurs.  That retest might not take place for several weeks, depending on the strength of this bounce, but it surely will take place.  If that retest holds, then the intermediate-term "W" bottom will have formed, and one might then adopt a more positive, longer-term outlook.

At this point, we've already seen a stronger rally than three weeks ago.  It has carried $SPX to its 20-day moving average, in the 1260 area.  The last rally failed when that average was encountered, and this one may too -- despite the euphoria created by the panic buying today.

The equity-only put-call ratios have not yet responded to the current rally attempt, as they continue to make higher highs on their charts.  This leaves them (historically) oversold, but not on buy signals.  However, Thursday's strong rally will certainly halt their rise, and a couple more days of bullishness might be enough to roll them over to buy signals.

Market breadth follows the broad market with extreme readings almost every day.  This is typical of an institutionally-dominated market: all the order flow goes one way or the other for nearly an entire trading day.  Thursday's rally was strong enough to register a buy signal from breadth.

Finally, volatility indices ($VIX and $VXO) have been jumping back and forth with abandon.  A 2-point move has become commonplace.  The monstrous 5-point drop in $VIX on Thursday means that it's closed more than 3 points from its recent high.  That is typically a buy signal for the market, indicating that $VIX has formed a (spike) peak.

So, many indicators are in place for a short-term rally.  Of course, they were in a similar state three weeks ago (both breadth and $VIX gave buy signals then), but the bears turned that rally back with a vengeance.  We don't expect this one to do much better, and don't think it will get much past 1260 on the $SPX Index.

Lawrence G. McMillan is the author of two best selling books on options, including Options as a Strategic Investment, recognized as essential resources for any serious option trader's library.