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Wednesday, August 3, 2011

S&P 500 scary chart…I’ll say!

Scary Chart Pattern Suggests More Selling on the Way

By: Patti Domm
CNBC Executive News Editor

The S&P 500 triggered a scary technical signal — a head and shoulders pattern in the chart — leaving investors to wonder if it's the sign of more selling to come — or just a head fake.

The so-called head and shoulders pattern is formed when the chart pattern shows three rallies, with the middle rally peaking higher than the first and second, thus creating a head. If the market breaks the "neckline," that is a trend reversal signal and can mean more selling ahead.

"What we're having is a classical technical breakdown. When the S&P broke down through the 1248 to 1250 region, it violated the neckline on a head and shoulders formation, " said Art Cashin, director of floor trading at UBS[UBS 15.76 0.05 (+0.32%) ].

"If it's a valid head and shoulders then you begin a countdown to where it occurred. I think it counts down to 1120," Cashin said. The market feels oversold and ready for a bounce, but the fact that the S&P is now negative for the year could weigh on sentiment, he added.

"You watch the rebounds. They should be restrained by the neckline at 1248 to 1252. A rally can only be a success if it punches above that," he said.

The pattern doesn't always trigger a break through the neckline and a selloff.

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