Stocks were hit by a rush of selling this week that landed all major indices back in correction territory. The S&P 500 (.SPX), Dow (.DJI) and Nasdaq (.IXIC) are down a respective 12 percent, 12.7 percent and 12.4 percent from their 52-week high. As investors weigh on whether stocks will resume their bull run, one technician warns there could be significant downside ahead.
"Our 2016 outlook was 'stealth bear market is revealed' and we think very quickly that it's becoming apparent that we are in a bear market," Jonathan Krinsky, MKM Partners' chief technician, told CNBC's "Fast Money" recently. "The S&P 500 is now down more than 11 percent from its May high."
"I think that ultimately this third test of the August low probably gives way and the next level [of support] is 1,820," added Krinsky. During Friday's swoon, the broad market index had its worst day since Aug. 24, and pierced that month's lowest levels.
"But more importantly, for the first time in three years we are in a downtrend," Krinsky added. "The 200-day moving average is firmly to the downside, so if you are trying to buy the dips it's equivalent of selling the rallies over the last three years."
For Krinsky, the worst-case scenario for the S&P 500 could be a re-test of the breakout from 2007, which comes in around 1,575. "It seems scary but that's only about 25 percent off the highs and that's well within the confines of normal pullbacks," he said. That's a more than 16 percent move from Friday's price of around 1,885.
Furthermore he pointed to the Russell 2000 (.RUT), which is already in a bear market, as a "leading indicator" for where large-cap stocks are heading.
"The Russell 2000 is already down 22 percent from its highs," Krinsky said. "When the S&P 500 didn't take out its August low, the Russell did. It's making lower lows and we think the Russell goes back and re-tests its 2011 highs of 875." He said it's when the small-cap index gets to that 875 level when the S&P 500 is in real jeopardy.
In this kind of tumultuous environment, Krinsky suggested investing in low-volatility names like utilities (XLU) and consumer staples (XLP-MX) and avoiding high beta stocks.
