On an intermediate term basis the market remains oversold. On a short term basis the market could climb through the end of this week before it would be overbought. Market participants are positioned conservatively according to most surveys and anecdotal evidence. When the news of the Spanish bailout came out it seemed the market was poised for a squeeze higher as under invested market participants would have been forced to chase the market higher.
The size of the bailout of Spanish banks seems large enough at 100 billion Euros, one could even call it overkill. The funding should not be an issue as the ECB is allowing the EU to fund it by issuing bonds. This is simply a fancy way of printing money while avoiding the embarassment of admitting to it. When Italian and Spanish bonds opened for trading overnight it was somewhat surprising that they only had modest gains. These modest gains have quickly turned into large losses in the face of what appears to be good news.
In the long run the situation in Europe is unsustainable with countries such as Italy and Spain having to borrow at such high rates. The hope was that with the Spanish bailout that the pressure on rates would ease but they have in fact worsened. This makes for a tough call as technically there is room for the market to rally. At the same time the market has come a long way and could use this negative fundamental development as a reason to correct a bit.