For days investors have absorbed the uncertainty surrounding the debt limit as stocks tenaciously held within a trading range that has been in place for over eight months. Yesterday, after weeks of wrangling, the bill was finally passed and the uncertainty removed, but the Dow Jones Industrial Average had its worst day of the year, plunging 286 points on 1.25 billion shares on the NYSE.

Traders and investors alike wondered what had happened. The question is even more relevant in light of a decision by both Moody’s and S&P not to cut the AAA rating of U.S.government bonds, after warning earlier that they were seriously considering doing so.

From a technical perspective, the S&P 500 broke the support at 1,260 that has marked three previous lows as well its 200-day moving average. This is a serious development. But contrary to some services’ headlines, the S&P 500 did not complete a head-and-shoulders topping pattern yesterday.

Our readers will remember that several technicians were even warning of an ominous developing head-and-shoulders as early as two weeks ago. This is akin to shouting “fire” in a crowded theater. I don’t have the time today to discuss the topic further, but readers who would like to research it may do so by going back to the Daily Market Outlook of Jan. 14, 2011, and July 1, 2010, for a more complete discussion.

Briefly, the following points are lacking in the current formation: Left shoulder volume is not higher than right shoulder; left shoulder is also not higher than right shoulder; and finally the neckline has not yet been penetrated by more than 3%.

Note that the CBOE Volatility Index (VIX) failed to follow through with a new high although climbing 4.7%. This is an interesting development, which tells us that despite yesterday’s high volume sell-off, the public has probably not yet panicked enough to have made a stable bottom. As stated last week, it is likely that readings in the 30s and possibly even over 50 may happen before a bottom is reached.

The focus has shifted from the legislative and political arena to theUnited States, and world economic situations. Investors are advised to continue with the investment approach outlined several times over the last two weeks: Traders should enthusiastically trade the short side of the market, but investors should have completed their list of high-quality stocks that they would buy at certain “bargain” prices.

Our internal indicators are now grossly oversold, so a reflex rally is likely to occur this week. But the rally will most likely be followed by a final low accompanying outstanding bargains in the best of technology, retail and industrial stocks.