The S&P 500 is flirting with our initial support level of 1080 and since our tactical discipline incorporates technical analysis, we are ready to lower our overweight to risk assets on a decisive breakdown. That said, we still expect this correction to be contained within a 'support zone' of 980-1050 (see Weekly Chart). We think there are several reasons for the correction: the dollar continues to rally, making new highs for the year, thus undermining the reflation trade; Greek credit spreads are making new 'wides;' and China appears poised for further policy tightening. We expect the dollar index - currently about 79 - to hit resistance around 81, but current momentum could carry it to the upper 80s. Initial relief following Greece's successful debt sale last week proved temporary as investors weighed the prospects of additional (and more expensive) debt sales later in the year, which raises the prospects of a bailout within the next several months. Under these conditions, we expect the euro - the dollar index's largest component - to continue its near-term weakness. Moreover, Greece is not the only Eurozone nation tackling a budget crisis; Portugal (among others) faces many of the same issues. This is all likely to keep the European Central Bank's monetary policy loose, which is good for global growth but bad for the euro.

David Fuller's view Have we just completed a perfect storm (in a teacup) for markets, following concern over China's incremental shift in bank reserve requirements and Wall Street's sulk over President Obama's call for the passing of what he named the "Volcker Rule" on regulation? Or are we at the beginning of something worse as central bankers and treasury officials attempt to steer their fragile economic ships through the current fog and between the Scylla of deflation due to overwhelming debt, and the Charybdis of future inflation sown by quantitative easing?

Stock markets are likely to tell us and I see three possible outcomes this year: 1) the cyclical bull markets resume; 2) stock markets are weighed down by the economic and policy conundrums; 3) they range erratically in zombie fashion.

I can only guess at the answer and subjectively estimate odds for each of the three scenarios mentioned above. However, the price charts should show us. First, and this is very short term, watch the lows seen in the last few days for leading stock market indices. Indices cannot signal continued corrections without closes beneath those recent lows. Second, and more importantly, watch to see what happens as the rising 200-day moving averages (MAs) are tested.

Eoin and I have often mentioned a correction risk towards those MAs, which we prefer to view on weekly charts. If the cyclical bull remains intact, major indices should encounter support above or no more than slightly beneath the MAs. If influential indices break beneath their MAs and then find resistance from the underside, and resume their declines, the technical picture will clearly have deteriorated. Now let's look at some charts which you can also find in the Library.

Starting with Asia, which led on the upside, China is the region's most influential market. China's various indices had moved slightly beneath their MAs in what I described yesterday as a 'moment of truth'. Today's action is positive as we can see with an upside daily key reversal for the A Shares but we need to see a push up through the yearend and January highs to reaffirm a medium-term bullish outlook. Failure to do so would narrow the discussion to between scenarios 2&3 above. Japan has mostly been an underperformer since its March 2009 low but had firmed recently with government talk about a weaker yen. The Nikkei did not maintain its recent upward break but is still above the MA and psychological 10,000 level. Topix is somewhat weaker and testing the MA in what still could be a developing base formation, although it has lagged well behind most other stock market indices. Japan's Second Section Index (TSE2) has often led, continues to underperform and is currently hovering near its MA. Indonesia has been Asia's best performer to date but it did have a small downside weekly key three weeks ago. It is still high relative to the MA and would begin to indicate an upside failure from the underlying trading range in the event of a close beneath 2475. India could not maintain January's upward break but is still above its MA, although a close beneath 16,000 would suggest a test of that level. Similarly, Australia fell back to test its November low, from which it has bounced. It needs to rally further to reaffirm support near 4500 and a move beneath this level would suggest renewed vulnerability.

In Europe, Germany's DAX also had a weekly key at the high and eroded support before the recent steadying. While still above the MA a close beneath last week's low would indicate renewed vulnerability. Switzerland has one of the steadier patterns among Europe's larger markets. While a close beneath 6390 would suggest a further erosion of support to follow, a sustained break above 6680 would reaffirm the ranging upward trend. As seen with so many other indices, the UK also saw an upside failure last month but remains well above its trend mean represented by the MA. However a close beneath 5140 would renew the decline. Denmark, one of developed Europe's smaller stock markets remains very steady and a close under 340 would be required to question higher scope. Sweden has often been a European leader throughout the recovery since October 2008 and although it shows a broadening pattern at present, a close beneath 930 would be required to indicate a further test of underlying trading.

The US stock market remains by far the most influential and will continue to have a leash effect on trends for equities elsewhere. Having broken its progression of higher reaction lows since July, the S&P 500 would extend its correction towards the MA on a close beneath 1070. The Nasdaq 100 has been the USA's strongest major index but has lost uptrend consistency recently and a close beneath 1730 would indicate a further decline towards the MA. Canada had a downside weekly key in January and a failed break above the previous trading range. It has subsequently steadied but closes beneath 11,090 and the psychological 11,000 would indicate renewed vulnerability. Brazil has been an outstanding performer but continues to encounter resistance in the 70,000 region, just below the 2008 high. It may need more ranging consolidation towards the rising MA before additional gains can be sustained, and it probably needs to hold above 60,000 for this to occur anytime soon. Although some other markets have seen bigger percentage gains, Chile has been outstanding in bottoming in October 2008, becoming the first market to clear its former high and it broke upwards recently. However, it is overextended relative to the MA and a close beneath 3740 would indicate a change of momentum.

What are the odds for either scenario 1, 2, or 3 above prevailing? This is a very difficult question and my answer is inevitably subjective and likely to change with events. But to climb off the fence today, I would rate Rod Smith's normal correction hypothesis - my number 1 leading to a resumption of the uptrends in coming months, at 40%. My number 2 is the most bearish outlook and I would place that at 20% for this year. This leaves a 40% estimate for the erratically ranging, zombie market environment. To further complicate the situation, not all stock markets are likely to do the same thing, unless bearish scenario 2 prevails. Eoin and I would not be surprised if the majority of global share indices conformed to scenarios 1 and 3, with a few in 2. Meanwhile, the best news today is that most stock markets are short-term oversold and closer to potential support from their rising 200-day moving averages.