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High Frequency Trading Led to Market Freefall: Art Cashin

Art Cashin, director of floor operations for USB Financial Services, called the market's steep drop "a classical technical breakdown" and said high frequency trading was contributing to the decline.

"When the S&P broke through the 1248-1250 (level), it violated what is called a 'neckline' on a 'head and shoulder formation,' " he said in an interview with CNBC. "You have a shoulder, which is a rally, and it comes back down, and then a higher rally, and then finally a third rally." When the market breaks down from those three peaks, it is deemed to be a head and shoulder, Cashin said.

The chart below details a clasic "head and shoulder" formation:

Cashin attributed much of the broad and continuing market decline to high frequency trading. Because high frequency traders use complex algorithms to make buying and selling decisions, once a key technical level is breached "the computers [instead of people] said ...we should sell right away, and that’s where you get into freefall,” he said.

(Learn more about computer-driven stock trading in this Special Report.)

Cashin said the prolonged sell-off may be changing investor psychology. “People look and say something is wrong, we’ve lost all the gain for the year, and that begins to change people attitudes," he said. "That can have a negative effect if people want to sell the rallies instead of chime in on them.”

While there's a possibility this is simply an overreaction, Cashin said, there are also reasons for caution given the escalating European debt crisis.

Wall Street is especially nervous about the financial crisis in Italy, he said. "Italy is deemed by people here to be to big to bail out, that even the Germans can't do it, so if the contagion hits Italy and the fever gets that bad then we probably have a problem,” Cashin said.

Italy has appealed to the European Union for financial assistance. On Wednesday, Italy's Prime Minister Silvio Berlusconi told parliament that while market tension is giving no sign of easing, the country's economy was solid. Berlusconi made the remarks after Italian bond yieldssurged and stocks got hammered by market fears that the country's high debt to gross domestic product ratio was unsustainable.

Cashin said "there is a possibility that a powerful, short-coveringrally could occur if something emerges in Europe tonight."

WATCH:A recent interview with Cashin on how to play the Greek debt crisis.

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Disclosures:

Disclosure information was not available for Art Cashin or his company.

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