What:  If the S&P 500 e-mini futures drop below 1036, then rise above 1052, we will move to 25% Bullish.

Why:  One of my pet peeves is the overuse of the word "critical" when describing a particular technical level or time frame.  I use it very, very rarely...but I'm using it now. The next 1-3 days (today most importantly) are likely critical for the determination of whether we're in the midst of a 2008-style sell-off (probably more like mid-January 2008 than late-September 2008) that's going to lead us into a multi-day meltdown and perhaps a new bear market, or whether we're seeing just another correction that always looks terrifying except in hindsight.  There are a number of reasons for this, mainly the depth and types of extremes we're seeing now, in addition to all of the post-crash studies we've looked at during the past couple of weeks.  Some measures have not confirmed any kind of excessive pessimism (e.g. small options traders, sentiment surveys), while others are nearly off the charts - the Intermediate-term Score stretched to 157% yesterday, which is the 3rd-highest on record (back to May 1999).  The only other higher readings triggered on 7/23/02 and 5/10/04.  There are a couple of other things pointing to another short-term rally.  For one, the reversal bar discussed in yesterday's report when followed by a down day.  For another, when the S&P has declined 1% or more the day after an option expiration, it was higher 75% of the time through Thursday (42 winners out of 56 trades).  During the bear from late 2007 through early 2009, there were 4 winners out of 7 trades, but the winners averaged +1.3% while the losers averaged -0.3% and none were larger than -0.5%.  Today's gap down is going to be yet another huge test, and if we drop below 1036 or so and continue down after the first hour of trading, then it could get really, really ugly - like halted trading ugly.  I don't *think* that will happen, but we can't rule anything out at this point.

What:  We will move back to Neutral if the S&P 500 cash index closes below 1055, or if it drops below 1044 on an intraday basis.

Why:  On April 15th, the Dumb Money pushed up to 75%, and the spread between that and the Smart Money reached to -45%.  In addition, we got a tremendous surge in the number of bearish (for the market) Indicators At Extremes.  That's the kind of development that doesn't necessarily indicate an imminent market peak, but it does almost always mean that any further short-term gains will be erased.  Now that that has happened, and volatility has exploded higher, we have a very unusual situation with the "shock day" on May 6th.  We looked at somewhat similar days on May 7th, and the conclusions were clear - a short-term rally was likely, probably being capped at a 62% retracement of the crash, then a re-test of the panic lows.  We're in the process of that re-test now. We've looked at quite a few intermediate-term bullish studies over the past week, but continue to feel that for now we will most likely see more back-and-forth trading before a sustained multi-week bottom is in place.  Since we're chopping around the lower end of that range and saw a relatively reliable reversal bar on May 21st, it made sense to expect more upside...but if the market cannot sustain it, we'll have to step aside and wait for better confirmation that buyers are still interested.