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.



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Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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