On March 17 our primary mechanical model for the S&P 500 Index generated a new buy signal. At one point I emphasized that the buy signal should be viewed as short-term until further confirmation materialized. On Thursday confirmation occurred when the S&P 500 20-EMA crossed up through the 50-EMA, so now we can assume that the buy signal applies to the medium term, and that the rally is likely to extend for several more weeks. At this point a sharp price reversal can quickly reverse the EMA crossover, but the odds favor positive outcomes.

There will be some concern that medium-term indicators, such as those in the chart below, are becoming overbought and could be warning of a price top close at hand. Since the market is now officially bullish for the medium term, I don't think we should worry when medium-term indicators become overbought. Such conditions can be relieved even as prices move higher.

Many will be assuming that this is the beginning of a new bull market, but it is too early to make such an assumption. The S&P 500 50-EMA is still well below the 200-EMA, so we are still in a bear market. The most optimistic we can be about the current rally is that it is a bear market rally.

Bottom Line: The market continues to behave in a bullish way, and a short-term buy signal has been upgraded to a medium-term buy signal. It is possible that it is the beginning of a new bull market, but the technical evidence says that this is only a bear market rally.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.