The morning rally faded in the afternoon to close near the low of the day. This type of action on Thursdays usually leads to more selling on Friday. It's hard to say what might happen if the house passes a bill on the budget and debt tonight, but the fact is probably nothing as the senate has already promised to defeat it. Barring some very positive agreement overnight I think the selling will continue tomorrow followed by a rally beginning either in the last hour of trading tomorrow or sometime Monday.
Caution is advised on short positions as a rally could come out of nowhere with the McClellan Oscillator down at an extreme oversold level and the SP500 nearing a potential target around 1286 to 1288. The lower trendline from the March 2009 is presently at around 1268 which is the most likely lower limit for the current leg down. I will be looking to exit short positions tomorrow on any sustained move below the 1288 level.