Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

After Tuesday’s massive intraday upside reversal, traders were encouraged enough to step in with some follow-through buying yesterday. That has brought a number of the majorU.S.and European equity indices into initial near-term resistance areas. 

On the S&P 500 hourly chart, we note that the 4% rally since Monday’s close has brought the index into an area of resistance between the 50% and 61.8% Fibonacci retracement level. While this is far from a major resistance area, it is a level to watch for some short-term profit-taking. 

Alternatively, should the index climb above 1,150 on a daily closing basis, it could potentially give way to 1,180 and beyond. In theory, that sort of move could then lead to performance chasing by funds as most of them are underwater for the year and desperately need to turn things around. The result could be a big rally into year-end.

Let’s have a closer look at the important support level reached by the Russell 2000 small-cap index on Tuesday. The area between 590 and 650 served as solid support in 2010. 

On Tuesday, the index briefly fell to 600 and then snapped back up quickly, leaving behind a big outside day on the daily chart and a long bullish hammer on the weekly chart.

Additionally, the stochastics oscillators are showing divergence between price, i.e., the index made a new low for 2011, but the oscillator did not. 

Thanks to the big two-day rally, volatility has come down in a meaningful way. After breaking out of what was a bear flag formation, the CBOE Volatility Index (VIX) has again fallen into this formation and below the 40 level. 

The 30 area remains the level to watch. As long as the index can remain above it, equities should continue to trade in wild swings. Medium to longer term (three to six months out), I still think the VIX could rally into the 70s.

The price action in broader equity indices, as well as in key individual stocks such as Cisco Systems (NASDAQ:CSCO) and Morgan Stanley (NYSE:MS), has been constructive the past two days, and sentiment readings are negative enough that this countertrend bear market rally could continue as we head into earnings season.