BEHIND THE MONEY: 'Head & Shoulders' Drop Setting Up a 'Selsun Blue' Bounce

John Melloy
Senior Editorial Producer
Fast Money

BEHIND THE MONEY: 'Head & Shoulders' Drop Setting Up a 'Selsun Blue' Bounce

The Bulls who have used this pullback over the last three weeks as a buying opportunity are now facing a bearish chart pattern that's getting a lot of chatter around trading desks.

The S&P 500

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[.SPX  Loading...      ()   ] formed a classic head and shoulders pattern beginning in early May with the first "shoulder", continuing in the middle of June with the peak "head" formation and ending yesterday with the completion of the second so-called shoulder. Yesterday, the "neckline" of this pattern was broken, signaling a further decline in the index. The pattern has been cited by UBS trading veteran Art Cashin, Brown Brothers Harriman's Andrew Burkly and the folks at Bespoke Investment Group, among others.

"Theory says that the target decline once the neckline is broken is the same distance as the head to neckline," wrote the Bespoke analysts, in a note to clients late yesterday. "In this case, the S&P 500 would fall to 827.86, or 6.03 percent."

Burkly thinks that you should dust off these concerns and that all this chatter may just be self-fulfilling, ultimately working in the bulls favor. "The worry generated by such a widely followed pattern like the head-and-shoulders could have the effect of elevating selling intensity and ultimately proving a the set up for a good tactical buy point in coming weeks," writes the Brown Brothers Harriman technical strategist. After this correction, he sees the S&P 500 climbing with renewed confidence to the 1000 level. I'll call that the "Selsun Blue Bounce".

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John Melloy is the Senior Editorial Producer for Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.

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Trader disclosure: On July 8th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AA), (AAPL), (BAC), (BX), (EEM), (FXI), (F), (INFY), (SBUX); Seymour's Firm Owns (FCX); Terranova Owns (MSFT), (XBI), (ABT), (OIH), (RIMM), (SUN) ; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman Owns (RIG), (TBT); Finerman's Firm Owns (FCN), (MSFT), (NOK), (PBR), (RIG), (TBT), (WMT), (FLS); Finerman's Firm Owns (BAC) Preferred; Finerman Owns (BAC) Preferred; Finerman's Firm Is Short (BAC), (IYR), (IJR), (MDY), (SPY), (USO)

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