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What Could Happen to Major Stock Indices When a Correction Comes

NEW YORK (TheStreet) -- It has been a long time since the stock market had a correction. Today we're going to look at the potential lows the major averages could see when we do get one.

At the start of August the five major averages were in a technical formation that came close to signaling a correction.

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On Friday, Aug. 8, the Dow Jones Industrial Average, S&P 500, Dow Jones Transportation Average and Russell 2000 had negative weekly charts with weekly closes below their five-week modified moving averages and with declining 12x3x3 weekly slow stochastics. The Nasdaq did not, however.

The Nasdaq closed that week one point above its five-week modified moving average with its weekly stochastic still overbought with a reading of more than 80.00. The following week, stocks began an impressive rebound and so did not confirm a correction.

I have always said that you cannot have a correction or bear market without all five major averages confirming market tops simultaneously. Without a fully negative configuration, new highs were very likely, and three of the five averages indeed went on to new highs.

The Dow industrials and S&P 500 set all-time intraday highs at 17,153.90 and 2005.04, respectively, on Aug. 26. After I wrote, "Apple, Intel, Microsoft, Netflix, Tesla Can Lead the Nasdaq Back Above 5000" on Aug. 28, the Nasdaq traded to a multiyear intraday high at 4580.27 on Aug. 29.

I would argue that the current situation is an equity bubble.

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