Classic theory predicts a big rally and then a huge drop for the S&P 500, according to technician

There's one classic market theory that could predict exactly when the next correction will occur.

Todd Gordon, founder of, says that the "Elliott wave" theory shows that while the S&P 500 has more room to rally, it will ultimately fall once it reaches a certain level. The framework, invented by Ralph Nelson Elliott, posits that each bull market rally goes through five different "waves" before a pullback occurs, with the first, third, and fifth waves moving upward while pullbacks happen in the second and fourth waves.

According to Gordon, the market is currently in that fifth and final upward wave. While the S&P 500 continues to climb, as it did in the first and third waves, once it finishes its current "trend channel," the market will begin to fall.

"At the current angle of ascent, I'm not calling a top [in the short term]," he said Monday on CNBC's "Trading Nation." "We could have a bit more of a rally, potentially reaching the 3,000 mark in the S&P 500."

That would represent a 20 percent rise from Monday's closing price.

Once the S&P does reach 3,000 the index could be set to come crashing down to 1,800, Gordon said. That would represent a 40 percent drop from those peaks.

"I think we stay long for now, but we need to be very aware that we are in distribution phase for this massive five-wave stock market rally," Gordon said.

The S&P 500 fell modestly Monday, dragged down by a drop in big tech stocks.



Trades to Watch

Trader Bios


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.

Follow Michael Santoli on Twitter @michaelsantoli

Read more