'If it cannot break above the 26,500 level, then it may just be another bear market rebound,' said Ricky Tam Siu-hing, the chairman of the Hong Kong Institute of Investors. 'Most of the time in the past 20 years during a bear market rebound, it has not broken above this level [midway between its recent high and low].'

For the blue-chip index's resurgence to become more than just a bear market rally, investors need to be sure that the dust has settled in overseas markets. Just as negative headlines from the mainland and the United States cooled off the Hang Seng Index, a sustained lifting of the gloom may be enough for it to catch fire once again. Investors will focus much of their attention in the near term on the floundering mainland markets. If A shares cannot sustain the market rally that began last Wednesday, local investors could take it out on their H-share counterparts.

'Right now, a lot of retail investors buying stock in Hong Kong are buying H shares,' Mr Tam said. 'That means that Hong Kong stock is highly related to A shares.'

The price disparity between the A- and H-share markets narrowed to a nine-month low last week, as local investors fine-tuned their trading of mainland-linked companies with the movement of mainland markets. The Hang Seng China AH Premium Index, which measures the premium of A shares to H shares, slid to just 130.88 points on Tuesday.

Any sell-off in H shares would be strongly felt on the Hang Seng Index, where mainland-listed companies make up four of the index's six strongest-weighted members and represent nearly 30 per cent of the benchmark, according to Bloomberg.

But Mr Tam said mainland authorities were committed to supporting domestic markets, and this could pave the way for the local market to climb as high as 28,000 by the end of the year. The so-called through-train scheme, which would allow mainland retail investors to invest in Hong Kong markets, could send the Hang Seng Index even higher.

Just as they will be watching the mainland markets, local investors will also be keeping a close watch on developments in the US economy.

After free-falling through five straight monthly losses, the Dow Jones Industrial Average and S&P 500 Index are both poised for their first monthly gains, signalling that US sentiment is picking up.

Industrial production unexpectedly picked up in March, the most since last November, and initial unemployment claims have been trending down.

Major financial institutions also seem to be keeping a tighter lid on subprime woes after Credit Suisse said last week that it did not need to raise capital, despite weathering a battery of losses related to write-downs.

Equity markets spiralled into panic earlier this year on reports of a collapsing financial system, but recent signs of stabilisation suggest that the worst may be over, giving a sense of support to global markets.

'Unless there is more negative news from the US on the financial crisis, we may have already seen the bottom [in the local market],' said Kenny Tang Sing-hing, an associate director at Tung Tai Securities.

The Hang Seng Index could trade as high as 28,000 by the year's end, Mr Tang said. But the market may still be vulnerable to volatility and could swing as low as 22,000, he added.

Meanwhile, on Friday, the benchmark failed to surmount the key 26,500 level and fell back 0.64 per cent to 25,516.78. 'The market rose for four days,' said Fulbright Securities general manager Francis Lun Sheung-nim. 'Short-term traders are coming out to take profits.'

Despite the profit-taking, the blue-chip index still managed to tack on a 5.45 per cent gain on the week to increase its advance so far this month to 11.67 per cent.

That represents the first sizeable monthly increase since last October, when the bull swapped places with the bear.