S&P 500 only in stage two of three-stage sell-off, Oppenheimer analyst says

Tuesday looks to be another volatile day on Wall Street. 

The Dow Jones Industrial Average fell more than 700 points late in the session after rising and falling earlier after the Federal Reserve unexpectedly cut rates by 50 basis points. Concerns over the economic damage of the coronavirus and global central banks' willingness to offset with stimulus kept investors on edge. 

One technical analyst said the sell-off that began less than two weeks ago isn't over yet. 

"To keep kind of trading expectations in check, very often there's these bottoms that play out in three stages – one, you have the high-intensity low which I think was achieved on Friday just given the surge in the VIX and extreme levels and the daily RSI and stocks below their moving average," Ari Wald, head of technical analysis at Oppenheimer, said Monday on CNBC's "Trading Nation."

The S&P 500's relative strength index, or RSI, climbed to 38 on Tuesday, bouncing from as low as 19 last week. Any reading below 30 suggests oversold conditions.

"After that, the market does tend to stage an oversold bounce; it does appear that we are in the process of that. This could last from days to even weeks," Wald said.

Then, the third and final stage sees a retest of the initial low, he added.

"What you're looking for is signs that selling intensity is abating. You're looking for a less intense low. Specifically, it's very bullish to see a new low but with a lower high in the VIX. That ultimately is your sign that the longer-term uptrend can resume," he said.

Wald said selection is key as the market undergoes these volatile moves. He is buying high-momentum stocks, especially within technology, on any pullbacks and lightening up on commodity-exposed sectors such as energy and materials.

 Chad Morganlander, portfolio manager at Washington Crossing Advisors, said it's still too early to call the bottom of the market sell-off. He sees severe economic disruption in several areas. 

"Overall, there are three things that we're concerned about: supply disruption issues, as well you also have earnings issues and economic growth issues. We believe that earnings and economic growth have to be revised down rather substantially. Therefore, we'd be much more cautious with buying into this rally at this point in time," Morganlander said during the same segment. 

Until he sees clarity on the severity of the impact, Morganlander is backing higher-quality investments, particularly those with little debt. 

"We're telling investors to move away from companies that have a lot of leverage on their balance sheet. Look at the steady Eddie companies that actually don't need to go to the outside capital markets to finance themselves overall. So look at consumer staple companies. Many of them we think can do well in the short and intermediate term as well," he said. 

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