US stock futures are giving some follow-through to yesterday’s reversal, pointing to a higher open but giving back some overnight gains. The market looked set to continue lower yesterday until the last hour, when an EU bank aid program was reported. European markets today shrugged off Italy’s three-notch downgrade and followed the U.S markets higher.

Shorting is a difficult game, especially in this environment when rumors and finance minister comments are hitting the market seemingly every few minutes. If you are going to short stocks or the market, you must have a firm plan in place for entries and exits. Last week we targeted a re-test of the wedge pattern as a place to start edging into some shorts, and I was able to add as the market ignored potential “window dressing”. My target for the short trade was a momentum flush down to the 1070 area in the S&P, which was the first major level of support below the 1101 August lows.

Some investors may have panicked and looked to get short/hedge or put in stops on long positions on a break of those August lows. That served to both clean out supply and intensify the squeeze yesterday afternoon. After news and action like we saw yesterday, it would seem a little imprudent to hold onto shorts at this point. The next few sessions will be crucial to determining whether that was the bottom for 2011, which I think is very possible. A powerful outside reversal day like that usually leads to significantly more upside over the next few days.

Right now I see an eerily similar set-up to what we saw last Summer, when the S&P broke 1040. The markets quickly plummeted down to 1010, then we rallied even faster back above 1040 with the same type of trap. Some fought the move for the rest of the Fourth Quarter. Some covered, regrouped and then participated with a nice rally that went into the New Year. With all that said. We need to measure the action the next few days and see if there is commitment to yesterday’s move. If we get a weekly close above the 1101-1120 area, the charts will look a bit more constructive.

Although the action is now more bullish, there are still a ton of problems in Europe and the potential of China slowing is increasing. We have the jobs number Friday, which will need to be decent. Corporate earnings are around the corner and could provide another boost. To this point corporate earnings have provided a boost for the market, but what happens if they start to slow down? Either way, it seems like the volatility will continue.

*Disclosures: Scott Redler has no positions