Technology shares were the first area to show cracks in the market sell-off, and remain the most vulnerable, the charts indicate.
The Nasdaq 100 index, which is the basis of the popular Powershares QQQ Trust ETF, is the major index most susceptible to a correction, according to Jason Hunter, head of fixed income and equities technical analysis at JPMorgan. Hunter says a correction into the fall could create a buying opportunity, but the charts show potential for more downside first.
The Nasdaq 100 is like a who's who for tech giants — with Microsoft, Apple, Facebook, Alphabet and Amazon — all members. The Nasdaq 100 and broader Nasdaq composite both saw important reversals in late July that helped set them up for more selling.
A sell-off in the hot tech names would be a concern since the sector has the biggest sway of any category over the entire market. Hunter said it would be healthier for the broader market and the S&P 500 if there were a rotation into financials and other sectors.
The Nasdaq 100 is up 19.8 percent year to date, about 3 percentage points better than the Nasdaq composite and up 10 percentage points more than the S&P 500.
"You could see this coming for awhile," said Hunter. "We've been talking about this pattern setting up back to May and June."
Hunter said in a note he had been looking for the Nasdaq 100 to have a hard time scaling 6,000, and the rally was showing signs of exhaustion around earnings season several weeks ago. The index failed to reach that level, and set a record closing high of 5,950 on July 26, which some technicians say could be the high for the summer.
"This goes back to June 9 when you had the first real outside day in the big-cap names. They rallied back, but June 9 was the first shot across the bow," said Peter Boockvar, chief market analyst at The Lindsey Group. "Now the FANG stocks are splintered. Amazon and Google [Alphabet] dropped out of the 'group think' with those names."
Facebook and Netflix are also part of the four FANG stocks, longtime bull market favorites.
"That was the first shaking of the tree. When you see these types of reversals it's a sign that investors are beginning to question valuations and fundamentals, and we all know the FANGs were the most overcrowded trade in this entire bull market, and that reached a pinnacle this summer," said Boockvar.
The Nasdaq 100 rebounded Friday, and was up nearly 1 percent to about 5,834 at midday. The index had fallen below its 50-day moving average Thursday, or below 5,807. Hunter said 5,568-5,672 is a key zone.
"Even if that area holds in Aug, we would view any bounce from that support as suspect heading into the Sep-Oct period, when equities have their most bearish seasonal pattern," Hunter wrote in a note.
Hunter said there is secondary medium-term support at the 5,542-5,479 level. That is followed by the 5,357 level, which is the 200-day moving average.
"Even if a more substantial drop occurs, we think there would be substantial buying interest near 5,000, the area from which the market broke out from in late-2016/early-2017," Hunter wrote. He said that would be the worst-case scenario, and would create a buying opportunity.
Boockvar said the 50-day was an important level, but it remains to be seen whether dip buyers will keep the market from going down much further.
"Specifically since February 2016, every time we got to major moving averages, we bounced. We'll try this time, but does it hold?" Boockvar said.