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Will This Head-and-Shoulders Pattern Be Different?

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This pattern has shown its face a few times and failed to trigger. When it did trigger, it turned out to be a fake-out.

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For the past few months the market has done a great job of absorbing some pretty bearish headlines. Sovereign debt headlines out of Europe have been frequent. Housing data has hardly seen an uptick. Disappointing jobs data was become the norm. We are a few years out from the full-on economic crisis, but some structural problems remain. We see that in our own debt crisis as well as the political circus in Washington.

As a trader and chief strategist, I try to monitor the action of the markets and the key stocks with an ear open to the headlines. Ultimately the stock action tells the story, but in this environment you have to be aware of what's going on around you.

At this point looking ahead, I see a Head and Shoulders Top Pattern in the making. This pattern has shown its face a few times during this 100% move off those March 2008 lows and failed to trigger. When it did trigger, it turned out to be a fake-out, and turned into a better long than a short.

Last summer we had a similar situation as the S&P toyed with the 1040-1060 area. Ultimately that level held and the markets went on to make new highs.

This time we have some bigger problems with a similar pattern. This could be the right shoulder of the pattern. It doesn't appear perfect, but it never is. I am more of a Cocktail Napkin Technician. I do not use the "exact" formation formulas.

The important area, in my opinion, for support is the 200-day at 1280-1285 area. The next neckline seems to be 1250-1260 zone, which is the pivot low area from 6/13-6/27. A close below this level triggers the pattern. Under that the next support level is 1220 from 12/08. But the real measured move of the pattern from the head to the neckline is around 80 handles, which gives us a move down to 1180.

We will need more time and data, and lawmakers may have to fumble this debt ceiling deal to get us there. We will have to measure the action of key stocks along the way. At this point regardless, Investor's Business Daily has the big picture in a "correction," which means cash is king until we see a new reversal setup that takes a week or so to develop.

I flattened out my macro positions this week and will cash-flow trade until I see more clarity and the new setup. There will be action both long and short as we hit levels of importance. Right now, the tail risk is just too high in the case a debt deal is not reached and our country defaults on its debt.

If you keep a level head and trade with a set of prudent rules, time periods like this can be the most profitable times for those that embrace volatility and think fast

I made a name for myself back in 2007 when I took a technical approach to the market and made some bold calls that we would hit below 10,000 when the Dow was still above 11,500. Many were saying the low was in. I'm not making a bold call right now, I'm just trying to put some contingency plans on the table so we can act fast and stay out of harm's way.

This morning we are opening lower as a debt ceiling deal has yet to get done, but we are now at the 200-day where I am going to test a small long in the SPY for a quick bounce. I won't be stubborn with this.

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Position in SPY

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