Stocks could fall another 10 percent before finding a bottom, Piper Jaffray technician says

Just over a month ago, the S&P 500 was setting record highs.

Now, more than 70 percent of the index's components is in a correction or worse with some high-profile names like Twitter, Caterpillar, Ford, and AMD deep in a bear market.

It hasn't found a bottom yet, according to Craig Johnson, chief market technician at Piper Jaffray.

"We had this kind of fake-out/breakout scenario. It's ended up becoming a fake-out similar to what we had seen in 2000 and 2007 and now we're coming back down to retest support at 2,700," Johnson said Tuesday on CNBC's "Trading Nation."

Before Tuesday's session, the S&P 500 had not traded below 2,700 since briefly touching and bouncing off that support level in late June. It is also the level it plunged below during its February sell-off, when it sank to 2,532.
It ended Tuesday roughly 1.5 percent above it.

"Usually when we get to this kind of weak internal readings we end up seeing some sort of flush-out. I think that flush-out is still ahead. I think it's going to be another 5 to 10 percent lower from here and it's probably going to take about 14 to 16 weeks to work out itself out," said Johnson.

A 5 percent decline would take the S&P 500 to around 2,603, its lowest level since early May. A 10 percent drop from current levels would push it negative for the year and 16 percent from record highs.

"The long-term uptrend support line comes in around 2,500 on the S&P," said Johnson. "That's where I think you'll find an investable bottom to get made and it probably is going to be a little bit longer before we get there."

Stacey Gilbert, market strategist at Susquehanna, says while options investors are betting on a recovery, any shock to the market could produce an even more dizzying decline.

"The majority of the flow that we see is investors selling out of their protection, buying some upside," Gilbert said on "Trading Nation" on Tuesday. "My biggest concern for the market right now is not what's known, it's the potential gap risk that's out there. … If we do go down, I am worried that the down drop is significantly larger than obviously ... what we would see on an upturn."

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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.

Follow Michael Santoli on Twitter @michaelsantoli

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