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What Interest Rates Say about the Current Situation?
In figure 2 you can see the performance of the SP500 index (red line) along with the performance of the USB bond Index (pink line) from October 3, 2006 to March 17, 2008. The figure is a screenshot capture from stockcharts.com (see [1]). It is apparent that though the SP500 index is currently in a free fall, the bond market is establishing a steady uptrend. Despite the fact that rising bond prices do not necessarily have a strong positive impact on stocks, a clear bullish divergence between the bonds and the stocks is taking place.

In figure 3 you can see the chart of SP500 from 2000 to March 2008. To illustrate the connection between the yield curve and the stock market which I covered earlier, eight small subcharts (snapshots form the dynamic yield curve of stockcharts.com) show the yield curves at eight different times during this period. The figure says it all. Not only the current (as of March 17, 2008) yield curve is Normal and steep but also the yields are generally low for all maturities. Clearly, the situation as described by the yield curve is not bearish.
 
…And What Technical Analysis Says
What technical analysis says about the current situation? My proprietary technical indicators stopped considering the long term trend of SP500 as bullish in November 2007 and the current trend of the SP500 is considered bearish by almost any classic technical analysis tool.

In figure 4 you can see that the SP500 is under its 200-day simple moving average and both the horizontal support HL-2 and the upward trendline TL-1 are broken. Also, near the horizontal line HL-1 (a previous resistance) the SP500 index created a confirmed reversal formation (double top or head & shoulders, whichever you prefer).

Summarizing
Interest rates are not just a tool for pure fundamentalists and history has proven that ignoring the debt securities market hurts.

Undoubtedly the current state of interest rates sends bullish signs for the stock market via the bond uptrend and the Normal steep yield curve but the final trigger must be given by technical analysis. One should not only look at what the market MUST do but also look at what the markets ARE doing. The current stock market status is technically bearish and “playing” a bearish game from the long side is not appropriate. From a practical perspective, the behavior of interest rates indicate that any upward reaction by the stock market should not be taken lightly and should not be considered by stock traders as an opportunity for aggressive short positions. Also, any technical bullish sign which will set the latest toping formation of the SP500 index (green line in figure 4) under contestation must be seriously examined as a failure of the formation. Bear in mind that a lot of other factors such as the positions of commercials and small traders in the derivatives market, the insiders activity (see [4]) and the contrary-opinion indicators from sentiment surveys are severely bullish so if a trend reversal from bearish to bullish commences, it will probably be a sudden and abrupt one.

Epilogue
I am not comfortable when my technical analysis contradict my other analysis tools and my answer when being asked my opinion about the current situation is: “well, my perception is bullish… but you know, the trend became bearish and I don’t argue with the trend”. In those tough times when you get contradictory signals form your various analysis tools, the minimum you can do is stop trading aggressively and consider significantly reduce your risk exposure using the derivatives market. If the contradictory signals are really strong and you feel uncomfortable then you can always stop trading completely until all things become clear.

REFERENCES
[1] http://www.stockcharts.com
[2] Murphy J. John, Intermarket Technical Analysis,  John Wiley and Sons (1991).
[3] Navarro Peter, When The Market Moves, Will You Be Ready?”, McGraw-Hill (2004)
[4] Siligardos Giorgos, “What The End of 2007 Showed”, www.trade2win.com,  www.traderslog.com
[5] Weir Deborah, Timing The Market, John Wiley and Sons (2006).