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Scary 'Head and Shoulders' Pattern Emerges in S&P Chart
CNBC.com | August 04, 2011 | 03:21 PM EDT

The recent selloff in stocks has triggered a scary "head and shoulders" pattern in the S&P 500 chart, signaling that there may be more selling to come.

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 .

"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.

"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.

"There have been a few head fakes with this pattern since we came off the 2008 lows," said Scott Redler of T3Live.com. He said the S&P started forming the pattern several times, but it was never triggered. "That's why nobody trusts this pattern, but it feels different this time."

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