All things considered anemic trading volume, record-high crude oil, major brokerage downgrades the markets did pretty darn well last week. The Dow Jones Industrial Average (DJIA) moved 2.5% higher for the week, and (by the skin of its teeth) managed a Friday finish atop its 10-week and 20-week moving averages for the first time since July 20. The Nasdaq Composite (COMP) was 1.4% higher for the week, edging back above the 2,600 mark, and the S&P 500 Index (SPX) rose 2.1%. All indices are in positive territory on a year-to-date basis, the Dow being the strongest performer in 2007 with a 7.9% appreciation rate.

But we've still got about 30 hours of pacing and nail-biting until we can get down to the business of figuring out the future direction of this market. At 2:15 p.m. Eastern time Tuesday, Ben Bernanke and the rest of the Federal Open Market Committee will come up for air with the decision market watchers have been anxiously awaiting since, well, the conclusion of the rate-setting board's late-July meeting. The investing world became even more anxious for the next rate decision when the August jobs report surprised to the downside. So with many investors preferring the safety of the sidelines, here we continue to wait, and as Tom Petty taught all of us, "the waiting is the hardest part."

The debate has increasingly been not if the Fed will lower rates, but by how much. On Friday, October fed-funds futures were fully pricing in a 25-basis-point cut and a 66% chance for a 50-basis-point reduction. The December contract fully prices in a rate cut to 4.25% (a full percentage point) by year end. This was up from 94% odds seen on Thursday. And a CNBC survey indicated that 18 of the 21 primary dealers who conduct business with the central bank expect a quarter-point rate cut to an even 5.0%. A minority of respondents think the Fed will lower rates by a half-point (50 basis points) to 4.75%.

Expectations for a Fed bail-out are running high, and if you're at all familiar with this site, you know the danger of high expectations. The futures market doesn't even seem to be entertaining the notion that the Fed will make the colossal error of failing to cut rates at all. This kind of surprise would be disastrous, and all bets will be off for the technical and sentiment indicators I discuss below.

The S&P 500 Index (SPX) continues to hover between support at 1,450 and resistance at its 80-day moving average. The 1,450 mark is home to massive put open interest (271,000 open puts in the September and October series combined) and the 80-day moving average was first breached on July 26 and has subsequently defined the top of the index's recent trading range. The Fed's failure to act would likely trump the former, while a cut of 50 basis points might be enough to drive the index through moving-average resistance and a potential return to late-July levels. A cut of 25 basis points might amount to a "non event," given such an action is fully factored into the market. Regardless of what the Fed does or does not do, price action in either direction could be exaggerated by the effects of expiration week, which has had a positive bias going back to January 2006.

Despite the respectable jumps higher in the market indices last week, the CBOE Market Volatility Index (VIX) remains above its 20-day moving average, which is a concern for the market. The SPX has lost only about 5 points (0.3%) since September 4, but the VIX rally during this same period is disproportionately strong (2.14 points, or 9.4%). It's entirely possible that the price action in the headline fear barometer is due to uncertainty with the Fed, and a growing consensus that if the Fed lowers rates by the expected 25 basis points, stocks may not react positively.

And I see these continued elevated VIX levels as quite rational, as it is becoming increasingly clear to me that a minimum of a 50-point cut is needed and that Bernanke is not likely to deliver on it. The rationale for such an aggressive cut is amply supported in three very recent thought-provoking media pieces.