Watching Scary Chart Patterns and Bearish Forecasts

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Published: Wednesday, 6 Feb 2013 | 8:24 PM ET  By: Patti Domm
CNBC Executive News Editor
Published: Wednesday, 6 Feb 2013 | 8:24 PM ET  By: Patti Domm
CNBC Executive News Editor

   


Whether stocks can break out one way or the other has been the question of the week, and the drama is building.

Naysayers on the market's recent gains are growing by the day, and investors waiting for a pull back so they can put cash in at a lower level are sidelined and frustrated. The Dow crossed the psychologically key 14,000 level Friday and the S&P 500 cracked 1500 the week before, two levels that traders say have the potential to trigger a pull back.

(Read More: Traders Search for Pullback Trigger as Fears Rise)

So, is there a scary head and shoulders developing in the S&P 500, as suggested by Art Cashin? Or, do we face an "earnings cliff" because of higher taxes and slower growth, as foretold by Blackstone's Byron Wien? Does the market have it all wrong and we're going to relive 1987, as per Seabreeze Partners' Doug Kass?

Despite all this talk, stocks meandered quietly back and forth Wednesday in trading that did little to settle direction. It did, however, provide a backdrop for a swirl of speculative talk, specifically whether beaten up Apple would buy back its stock and raise its dividend. The unconfirmed rumor was sparked by bullish comments from famed Legg Mason fund manager Bill Miller, but it gained momentum and zipped across markets, lifting stocks mid-morning.

"The pain trade right now is those calling for a correction, as they continue to lose money while the market rides higher," said Mark Luschini, chief investment strategist at Janney Montgomery. The Dow rose 7 to 13,986; the S&P was up less than a point at 1512, and the Nasdaq fell three points to 3168.

"The market is acting as though it's a bit overbought," he said. "I don't think a day like today is indicative of selling, as much as exhaustion of buying."
Play VideoCashin: Now … Watch for These S&P Levels
In his daily CNBC.com-only video clip, Art Cashin of UBS talks with Bob Pisani about the S&P levels that could indicate either a continued rally, or a significant pullback. Cashin, director of floor operations at UBS, has been watching a quickly formed head and shoulders pattern over the last couple of days. Cashin said it's very unusual but very pronounced, and instead of forming a head and two shoulders, it appears to be working on two heads.

"The left shoulder was around 1510. The head was around 1514 and we were looking at a right shoulder back at 1510. They exceeded that, and we have a two-headed formation," he said.

Cashin said the S&P now needs to cross 1514 and hold above it, at a level like 1517 in order to break out of the pattern. But if the S&P instead heads to the neckline, at 1495, it could signal a downturn. The distance down it would go after that depends on the shape and time, he said, adding it could first go to 1475 or 1450.

(Read More: Sucker Alert? Insider Selling Surges After Dow 14,000)