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I like to look at both technicals and sentiment in conjunction with one another. I often hear traders lament that sentiment is so negative, the market has to bounce. But without some positive technical action to spur a rally, sometimes negative sentiment merely moves to more extreme levels.

The charts above show the technical action in the SPX and COMP. The SPX has broken above both of its key moving averages, and could make a run towards previous highs after some consolidation. The Nazz is not there yet. Although it has broken above its 50-day, it still faces formidable overhead resistance.

Despite last week's sharp rallies (the Nazz has its biggest weekly rally since 2003), sentiment is still mostly negative. As such, it is going to take even higher prices and more short covering before we start to see the tide turn in any meaningful way.

Two extreme examples that I found over the weekend are the AAII bull/bear spread and the ISE Sentiment Index:

• The bull/bear spread in the AAII has now been negative for 14 consecutive weeks. I went back all the way to 1987 (as far back as the data goes) and only found one longer streak - 1990.
• The 10-day average ISE Sentiment Index hit a new multi-year low last week at 107 (read: very light call buying = bullish from contrarian perspective)

The fact that so many remain skeptical of last week's rally could help it last longer and propel it further than most expect.

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