Today the SEC announced new actions and penalties applying to the short selling of stocks.

Effective at 12:01 a.m. ET on Thursday, September 18th, 2008 new penalties will apply to traders who sell short securities without actually borrowing the security and delivering it back into the market, or what is known as a naked shorting.

Traders and broker/dealers will be held to T+3 settlement. In the event of a fail, the broker/dealer can no longer offer short selling in the failed security to any client unless the shares are already located and pre-borrowed.

The SEC also eliminated a provision that now holds option market makers to the same "hard T+3" settlement requirements of all market participants on short sales.

To add some teeth to the changes the Securities and Exchange Committee adopted the "Short Selling Anti-Fraud Rule" that criminalizes lying about intention or ability to deliver a security when transacting a short sale.

It is being reported by CNBC commentator Dylan Ratigan that the Federal Reserve has agreed to extend AIG an eighty-five billion dollar "bridge loan" to assist in helping the ailing insurer avoid bankruptcy. In consideration for the capital, AIG will grant the Federal Reserve a warrant to acquire up to eighty percent of the company.

AIG, a global insurance firm with a balance sheet in excess of one trillion dollars, was on the brink of bankruptcy Tuesday as it struggled to meet short term liquidity needs. Were AIG to default many market observers and participants feared a cataclysm on Wall Street and in financial markets as AIG reaches into nearly all aspects of the financial ecosystem. Unlike other distressed financial institutions, AIG is considered to be solvent by analysts covering the company.

Over the last six months what is known as a falling wedge to stock market technicians has taken shape on the chart of the S&P 500. A falling wedge is a price pattern that is marked by five distinct reversal points that converge as price approaches the apex, or shortest distance, of the technical formation. Falling wedges most often presage upside reversals in price but require additional confirmation.

The most important market confirmations required include:

• increased volume as price begins to move up and away from the fifth and final reversal point and
• the pattern should be preceeded by a down trend of at least half the length in time it took for the wedge to complete.

Let's look at the current chart of the S&P 500, a broad measure of the US stock market.

On the chart four of the five definitive reversal points are clearly visible. Currently the market is probing for the fifth point before it will determine whether the pattern acts as a major reversal point for the market or evolves into something else. 'Something else', can either be a continuation of the decline in market prices or sideways consolidation.

One important concept to keep in mind is the price move of a failed technical pattern is quite often more powerful than if the pattern completed as contemplated.

With that said, the turmoil in the credit markets, the collapsing financial institutions, the historic level of pessimism on Wall Street and Main Street may, when viewed through the prism of the falling wedge reversal pattern on the Standard and Poor's 500, may be signaling a tradeable low in the near future for the market.

While Lehman Brothers is destroyed by capitalism's forces of creative destruction, the fate of AIG's trillion dollar balance sheet hangs in the balance as the rating agencies down grade the insurance giant's debt.