As Tony G mentioned in the comments Wednesday night, SPY has a bearish descending-triangle pattern on its chart. The pattern has been established over three weeks, so it looks pretty solid. Here is a 60-minute chart (click to enlarge):

(I find that hourly charts are the best for spotting emerging patterns.)

If you look at a TRIN chart over the same period, you will see that the last two Monday Massacre sell-offs were dramatically more intense than the first sell-off that began on August 11th. The TRIN takes into account not only the number of stocks advancing/declining, but also the volume.

I think that this increasing intensity is due to bulls having their mouses hovering over the sell buttons on their screens. Bulls with profits in this bear-market rally look like they are being very quick to lock them in by selling in when the market starts falling.

A couple of weeks ago, I got burned by trying to play a descending-triangle pattern on the USO. An oil inventory report was released and USO blew out of the pattern to the upside. I miss-played that set-up because USO was oversold, and the pattern was only about three days old.

SPY’s descending-triangle is very well-defined over a nice period of time. SPY is also overbought on a short-term basis, and a longer term basis. Good news in the form of the durable-goods number on Wednesday morning, failed to break SPY out of the pattern to the upside, so it looks like the large players have little interest in accumulating stocks, even on good news.

I like the set-up technically. I also like it fundamentally. The economy is clearly slowing. So is the global economy. And the credit crisis is actually getting worse judging by credit spreads, and more banks being added to the FDIC’s trouble list.

I think the big funds will likely be able to keep the market from breaking down as they bid underneath to keep their monthly numbers looking good. While they are not always successful at the end of a month, with light holiday volume, they should be able to do it this time.

So, I’m thinking that SPY doesn’t break $126 this week, but will probably do so early next week. And then SPY should quickly proceed to testing $125.

SPY has tested, and bounced off of, the support around $126 twice so far. The textbook says that the third time is usually the charm. So, I have taken a short position in the futures, and am hoping that the big funds can hold things up long enough Thursday for me to complete an all-in short deployment.

SPY’s old breakout area at $129 served as resistance Wednesday. So, our trading range is $126-$129. If any of this week’s remaining economic reports pushes SPY above $129, I will be shorting as I think it will likely prove to be a false breakout.

Keep in mind that the tape has not rolled over yet, as of Wednesday’s close, though the futures are down a couple of points as I write this late Wednesday night.

Thursday and Friday will be very interesting. On one hand, you will have the big funds bidding underneath in a low-volume environment. They usually win. But on the other hand, you have increasingly jittery bulls itching to get out alive. With at least a neutral news flow, I expect the big funds to win with SPY perhaps being range-bound between $127-$129 for the rest of the week.

There may be 90 billion barrels of oil at the North Pole and both the Canadians and Russians are training-up for Arctic combat. Russian bombers already patrol the area while Canadian fighters chase them off. The “cold” in this new Cold War now has a double meaning.

Oil is finally responding to Hurricane Gustav, but stocks are looking to open up on a “good” durable-goods number. My dream is for a move back up to 1285 where I will be shorting.

Watch the comments section for updates throughout the day.

On his Mad Money TV show on CNBC today, Jim Cramer declared that the homebuilder stocks had bottomed. He showed the charts of the major homebuilders, pointed to the July low, and declared it to be THE bottom. A guy on Fast Money was also all a-twitter over the homebuilders, and said that the XHB had a double-bottom on its chart.

Well, here’s the weekly chart. I don’t see any double-bottom on it, or reason to believe that THE bottom is in (click to enlarge):

The XHB was invented at the top of the housing mania in early 2006. Since then, it has been in a steady downtrend (blue lines). A bottom was made in early 2008, but the declining volume showed that it would not last (black lines).

In July, another bottom was made. But the sharp rally was made on an equally sharp reduction in volume (purple lines).

Is the big money buying homebuilder stocks? It sure doesn’t look like it. Will the talking heads on CNBC be able to keep the XHB running? Well, it looks like the XHB is already rolling over. This rally looks like a classic, sharp-and-low-volume bear-market retracement.

Cramer also denied that he had ever called a housing bottom before. But he definitely did so back in 2006 during the first bear-market rally in the sector (which you can see on the chart). In fact, he had a pile of sand on the floor of his show, “drew a line in the sand” on the homebuilders, and declared that the bottom was in. That was a memorable show. Cramer has literally been calling the bottom over-and-over for years now. And he shows no signs of stopping any time soon.

According to my trading program, the TRIN closed Monday at 2.03. While that is a very oversold level, it is no guarantee that the market will bounce. Looking at recent history, a high TRIN only presaged a bounce while the market was up-trending. So, if the market is beginning another leg down, then it will do so regardless of how oversold it is.

However, since this is Month-End Markup Week, I would be surprised to see a plunge. The big funds will do their best to keep their holdings up so that their marketing departments will be able to paint rosy pictures for the month. And with volume being so light, the big funds can easily levitate the market.

Of course, if there is a disastrous event, not even the big funds will be able to keep things from falling apart. Such an event would be along the lines of a super-spike in oil, a massive loss of jobs, or a spectacular bank failure.

If we don’t get anything like that, then this week could look much the same as last week: maybe a little more downside, then the big funds come in and buy, the market stabilizes, and then rallies to end the week.

But I wouldn’t hold any long positions over the weekend, because such a scenario would be a recipe for another Monday Massacre.

Hurricane Gustav is headed straight for the Gulf of Mexico, but if it does go there it wouldn’t arrive until next week. So far, oil is not reacting to the storm.

Watch the comments section for updates throughout the day.

The market seems to have run up on Friday in anticipation that the Freddie, Fannie, and Lehman disasters would somehow be transformed into miracles over the weekend. In the absence of said miracles, the market looks like it will open down on a gap.

Watch the comments section for updates throughout the day.