A whipsaw is characterized by a quick reversal in price movement from one direction to the other by a security or index. In July we witnessed a textbook example of a whipsaw, as the S&P 500 gained 6.9% on the heels of a 5.4% loss for the previous month. These dizzying market movement can be quite frustrating for investors who are left desperately trying to keep pace with the direction of the market.

While the July rally was impressive, the S&P 500 seemed to stall in August as it hovered just a few points above the 200 day moving average. This formidable level of resistance was responsible for putting an end to a late June rally, where the S&P 500 managed to breach the 200 day moving average for a few trading sessions only to plunge to new lows thereafter. If today's market movement to the downside is any indication, we could be seeing a similar scenario play out. The two percent market dip today taking us back below the 200 day moving average is not the only foreboding signal on the chart today: the MACD and stochastic have rolled over with the MACD just turning negative as I type. If this results in any significant pullback, I will be keeping a close eye on the levels of support around the neckline of the Head-and-Shoulders Top formation that is still in play.

I had originally drawn the neckline of the Head-and-Shoulder Top formation at the 1,040 level on the S&P. In watch watching for a breaking of the neckline one must a have a 3% close below it for it to be truly violated. A quick trip below in early July did not succeed in achieving the 3% goal. As a result, I have redrawn the neckline to include November 2009 lows as well as the recent lows put in during July. The result is a slightly tilting neckline at around the 1,020 level. If this level is retested, it would also result in the formation of yet another right shoulder, a common in feature of complex Head-and-Shoulder formations.

If the 1,020 level is breached, however, the S&P 500 could be in serious jeopardy. Keep in mind that the last time we saw a Head-and-Shoulders Top formation fail was in early 2008 - and we all know what happened next. Conversely, should the market rally again, we would want to see resistance levels of 1,130 be taken out for confirmation of the move.