Double bear failures?

Yesterday
wow, I am quite stumped, being very bearish on the overall market I am very surprised we have failed two major bearish patterns thus far. While volume was not all that strong, however it was not light enough to call this a suckers rally.

[yesterday]
This is a very unlikly scenario meaning that we would continue on the upside without a major retracement and a final stopping point in the 795-805 range. Again this is very unlikly to occur but would be inline with major bottoming pattners. While the retracement is to be expected it should be small and cannot drop below the 751 range, if it does it must stop at 745 and reverse back above 751 in less then 2-3 hours. Time wise this should be occuring within 2 days max (preferrably less).

While it was very unlikly to fail such a strong bearish wedge it goes to show the current market sentiment. Not only did we fail the wedge it seems but also a 3 day head and shoulder pattern.

Why is this occuring you may ask? From a fundamental perspective we are getting quite a bit of good news, not great, but better then the extreme negative outlooks. This plays very well into many investors and traders that feel a bottom may have been reached, additionally many are looking at another 150/1200 points on the upside giving longer term investors a chance to lower cost on positions to be able to move those once we reach the top. Additionally many have been waiting on the sidelines and are starting to chase the up run, you could clearly see that yesterday where buying occured before reaching major retracement points - impatient traders willing to assume a bit more risk to get in on the long side.

Now the other thing to consider is the many that went short at the 740 range (me included). We are reaching points where many shorts are being pressured quite a bit. On long term swing positions it is acceptable to have quite a bit more risk assumed in positions but many continue covering - what you saw towards the end of the day yesterday was classic short covering. As we continued higher all day instead of profit taking you saw buying to cover shorts.

The question to ask, for many of the shorts, where is the point of accepting defeat? I believe we are near this point and many have assumed the 780 levels as the last point before completly exiting positions.

We have broken the 774.50 range and closed fairly high towards the last major resistance point here. 7400-7450 and 780 both are very strong resistance lines that require a lot of momentum to be broken, we are right on the edge of this point.

Today
If we are to continue on the upside we need to see a real test at the 7400/780 from here. Now it is quite easy from here to determine if this run will continue on the upside. The most likly scenario is an ascending triangle formation that should be built today with a retracement towards the 759-761 range. Even the 751 range is acceptable now for a valid uptrend so bears be careful - this would indicate a double bottom formation ahead of a major resistance point. Bulls need to absorb sellers and remove the overbought conditions to have a chance at a clean break, if we are to break this range today it should fail due to being too heavily overbought - so watch for potential sideways or slow trend down towards thew 751 targets.

The other scenario towards the downside is quite unlikly today, if we are to continue on the downside a strong day is needed on high volume, even if we fall 2-3% today we are still with a good chance at a 780 break on the upside so be careful here and watch turn arounds carefully. If your trading software supports it take a look at time & sales at SPY and filter by larger orders (above 10K shares), this will give you great signs today to see what major players are doing and can give you confirmations - again even a down day today can be bullish so you need to be able to distinguish between a bearish down day and bullish down day (yeah sounds silly sorry).

Note
schismatic, thanks =). chaugner is my online handle for lots of things, first initial last name (Chris Haugner). Blog wise I normally only visit http://www.gannfann.typepad.com/ (Patrick is the owner). He definitly knows his stuff and has very similar views to what you see here. A few readers here are also on his blog as well. So if you are in doubt here, give his blog a read to confirm. With 50 new trading blogs coming up every day its quite difficult to find the ones that actually add value and know what they are talking about.

EDIT: How to trade this?
As much as I like to give advise it is very difficult for me to make a statement here. Even now I am still not a believer of this rally. It is very difficult to make a decision for entry and exit when you do not believe in the current trend. Better to stay on the sidelines until you are on the same side as the market is. I am getting closer to this bullish trend but need to see a few more things happen before I can say again that we are on the right side.