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.

Read More: 10 Stocks Carl Icahn Loves in 2014

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.

Read More: How the American Air Merger Helped Charlotte, Philly and Fort Wayne

If you liked this article you might like

Forecast for S&P 500, Dow Industrials Remains Bullish, These Charts Show

Dow 20,000! It Should Mean Nothing to Investors, but Then Again...

Tradebird Investors Are Bullish on U.S. Stocks but Bearish on the Euro

Why Home Depot and Boeing Stock Fell Tuesday