Trading Nation

Why the market's drop may just be getting started

Stocks have much further to fall: Technician

The has suffered a brutal beginning to the year, falling 8 percent in its first 11 sessions. And Oppenheimer technical analyst Ari Wald sees no reason for the selling to conclude just yet.

Wald reduced his first-quarter target for the S&P 500 from 1,900 to 1,740, which implies a further 7 percent drop from Tuesday's closing price.

The first impetus for his call is historical. Wald finds that in similar, non-recessionary downturns, the S&P 500 has tended to drop 20 percent over an eight-month period.

Beyond that, oil's dramatic downside move "and coinciding resumption of weakness in the energy sector should pull the S&P to 1,740," Wald wrote in a Tuesday email to CNBC. "We continue to recommend selling energy."

Finally, a target of 1,740 would represent a 38.2 percent retracement of the S&P's epic bull run from 2011 to mid-2015.

Random as it might sound, 38.2 percent is an important number in technical analysis. A so-called Fibonacci retracement figure, 38.2 percent is generated from the famous Fibonacci sequence of numbers (1, 1, 2, 3, 5, 8, 13…). Specifically, dividing a number in the sequence by the number two numbers after it will yield 38.2 percent, as long as one is looking sufficiently deep in the sequence.

Using that extremely specific number to forecast an index price might sound like voodoo, but it is not; it is technical analysis.

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Taking a fundamental tact in a Tuesday "Trading Nation" segment, Erin Gibbs of S&P Investment Advisory says a drop to 1,740 isn't totally out of the question.

She points out that if investor nervousness continues and the S&P 500 valuation continues to fall, it would be easy for the market to trade at 14.5 times expected earnings — which, given current earnings expectations, would represent an index level of 1,735.