SPY Rising Wedge

Here is a chart of the bearish rising-wedge pattern on the SPY intra-day chart that I mentioned earlier (click to enlarge):

The wedge is bounded by the purple lines, and began to form Monday afternoon around 3pm. Notice that volume picked up dramatically before the close Tuesday. That is a potentially bullish development since it might indicate that the upper boundary of the wedge will be pushed upward.

However, notice that that surge in volume was absorbed in the resistance area bounded by the blue lines on the chart. Quite a lot of buying was absorbed, so there were quite a lot of sellers. That area marks the cliff that the market fell off of when the House shot down the TARP. So, the traders that were betting on the TARP passing, and were instead treated to an historic plunge, were selling furiously into Tuesday’s rally, no doubt with great relief to get out even.

The surge in buying at the end of the day was triggered by news reports that the FASB mark-to-market accounting rules were in play. Some Republicans have said that if such changes had been part of the TARP, it would have passed the House. Mark everything up and save the taxpayers some money, right?

I think that the buying on Tuesday afternoon reflected way too much hope, just like on Friday afternoon. This FASB discussion says to me that the TARP is still DOA and our leaders are instead cooking up new crazy schemes. I see disarray.

So, the market is full of hope, has rallied on no real good news, has hit a resistance area, is overbought (short-term), will no longer benefit from quarter-end mark-up, will probably get hit by a wave of hedge-fund redemption selling, and Congress seems intent on doing nothing at all.

The only thing that the market has going for it was the momentum at the end of the day. However, the futures immediately sold off on heavy volume after the bell, so that momentum is likely gone too.

One more thing to consider: even though a lot of systems have messed up data and you might not be able to see it on your chart, the two-day candlestick pattern for SPY is a bullish Harami. I think there is a good chance that this bullish pattern will be broken since it is coming on the first day of the month when the big funds are likely to pull their bids.

Gun-to-head, I would be short.