Bye-bye bull—this is the market’s ‘final wave,’ warns the 'Northman Trader'

The market has enjoyed a stellar bull run, but a correction is likely looming, according to Sven Henrich, also known as the "Northman Trader."

A very long-term analysis of the S&P 500, in conjunction with a look at the CBOE Volatility Index, leads Henrich to believe the market could see a 5 to 10 percent drop in the near term.

"We're coming from a point of view that we're in this kind of final wave of this bull market, and the market is transitioning from a 'buy the dip' to kind of a 'sell the rip' environment," Henrich, who runs an independent market analysis subscription service called "NorthmanTrader," said Wednesday in an interview on CNBC's "Trading Nation."

Specifically, Henrich is eyeing a trend line extending back to the market's infamous 1987 slide. This line intersects briefly with the market at 2003 lows, then once again at a "key pivot" area, Henrich pointed out, when the S&P took a large downturn in 2009. This trend touched resistance at the 2015 highs, and is now looming just above the market's current levels.

"So if the market rises above from the current highs, then we expect there to be significant resistance," Henrich, who has garnered a wide following on social media for his market commentary, said Wednesday.

At the same time, the CBOE Volatility Index (known as the VIX) has been highly "compressed" this year, which Henrich noted is very unusual to see as the market reaches new highs. In fact, Henrich said, the VIX is trading in a lower and tighter range than in the "record compression years" of 2006 and 2007.

Yet Henrich doesn't believe the low volatility can last. He says the VIX has formed a series of "rounding bottoms," which tend to resolve themselves with substantial rises into an area marked by a declining trend line.

With the VIX in another rounding bottom, "timing-wise, it looks like it may want to spike up in that range again."

Moreover, Henrich has observed that this year the market has behaved in a particularly "bifurcated" way.

The broader market shows "really high strength in mainly the large-cap stocks … but we see notable weakness in multiple sectors, such as retail, energy, small caps, and some concerning chart patterns and trends for the utilities," he said.

"So the market has kind of differentiated itself, and the question is, OK, can the other guys catch up, because they're reaching oversold levels? Or will the larger-cap stocks finally show some corrective activity?"

Henrich says that the latter condition is more likely, since some of the best-performing stocks "are extremely stretched to the upside."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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