He said he expects the S&P 500 to test the 1,867 low set Aug. 24 when the market plunged. "Traders are watching the 1,915 to 1,935 area (on the S&P). If we get a close below that, it will give some confidence that we do get down to test that 1,867 area and get that out of the way."
Redler said he is now looking to the Fed's meeting next week as a potential event that could set the direction for trading. The markets are split on when the central bank will raise rates, with the fed funds futures showing a low chance for a move in September but many forecasters still seeing a hike.
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"I think the market would rather have liftoff than put off. I think they would have been prepared for liftoff," Redler said. "One thing also is that the market is vulnerable in late September, early October which is when real bottoms have been put in." Redler noted that it will be a negative when corporate stock-buying programs are put on hold starting in the next week for a blackout period ahead of the next earnings reporting season in October.
Ari Wald, technical analyst at Oppenheimer Asset Management, also expects the market to test its August low, sooner or later. He said he is cautioning clients that it is too early for aggressive buying and that the market could actually see a 20 percent decline peak to trough. The S&P could then possibly fall to the 1,740 area.
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"There was a significant breakdown in August. The market fell from an eight-month topping pattern and is going to take more than a couple of weeks to recover from that," said Wald.
"Rate hike or not, we think this volatility continues, and there's going to be more work needed. If we do see a fourth-quarter rally, I think we're capped at 2,050 on the upside, and it's possible we do test the lows from August and move even lower than that. Even if you make the case for no economic recession, that the data is fine, it would be normal to see some cyclical pause to reset. It's been six years of market gains. We think we're due for a sideways market for the next few months."
Wald said stocks are also vulnerable to seasonal factors, with September often a weak month for equities. "It's worse with weakness coming into it, when you're already below the 200–day moving average," he said.
"These little bounce attempts face a lot of resistance. There's no signs of a bottom here yet," he said.
Friday's data includes PPI producer inflation data at 8:30 a.m. ET and consumer sentiment at 10 a.m.