It may surprise you that I liked Tuesday’s stock market pattern, considering that the S&P 500 did not recapture the crucial 1326 weekly and monthly support level. But the week and the month are not over yet, and many of the most memorable lows in stock market history happen with a deep, washout low like we saw yesterday morning, followed by a strong rebound. The S&P 500 was down over 50 points to 1274 about six minutes after the opening, but it got back 35 of those points during the rest of the day. In premarket trading, the S&P futures got down to the equivalent of 1250. The rally back left a long “tail” down on the daily (and possibly weekly) candlestick chart, which is a common pattern marking a turn.

The VIX Fear & Greed Index also spiked up to the high 30s at one point, and closed at 30.01, up more than 10% on the day. That’s a confirming indicator that we’ve seen a point of maximum fear for now.

In Tuesday’s Flash Alert I said that we do not want to see two or three of these days in row, as that is the “crash alert” pattern. So we need to see the S&P build on Tuesday’s intraday rebound right away, recapturing 1326. Of course, we could first see a test back down to 1274 that is rejected, but then we need to see a solid close back over 1326 to really believe this is not a bull trap. As long as the S&P stays under 1326, it is still in the “crash zone” where something bad could happen. Once it clears 1326, it should be out of immediate danger.

It looks to me like there is enough negative energy now to push the S&P 500 back to 1440, albeit in a two steps forward, one step backward fashion. It might take a couple of months of backing and filling to get there, but when it happens, breaking 1440 is a prime candidate to set off the next and last leg of this bull market. I don’t know what news at the time will be designated as the “cause” of this move, but that is how the chart is lining up.

I think the rally back to 1440 is in the cards for sure, but we will have to watch very carefully what happens there. In many ways, the S&P is following the pattern of August to November 2000, when the drop in July stopped around 1440. The market then rallied into late August, but declined through September and broke down through 1440 in very early October. By mid-October it was rallying back towards 1440, even including a couple of “long tail down” days in mid- and late October. But that test from below the 1440 breakdown level failed right at 1440 in the first few days of November — then the longest Presidential election ever spooked investors, and the vicious bear market of 2000 to mid-2002 was on.

So here we are with 1440 as a crucial level once again. The S&P will go up there either as one last test before a bear market begins, or as a crucial, successful move to start a strong new uptrend. At this point, it looks like the latter to me. As long as the index stays above 1263, I will treat every move down as a test probing Tuesday’s lows, so there’s no need to change my mind or my advice to treat weak days as buying opportunities.

The two-year Treasury note rallied Tuesday to close at 2.01%, which means that even after the Fed’s big cut, they are still 1.5% behind the curve. It will be interesting to see how big the next reduction is on January 31 — 75 basis points or more will tell us that Bernanke finally gets it.