• Shares need to recover decisively on Friday to avoid triggering a sell signal, analyst Katie Stockton said.

• If certain technical indicators flash, it would indicate a 10% correction, he wrote.

• However, seasonal strength could help stocks recover quickly.

Investors are re-entering the stock market after it staged a dramatic pullback on Wednesday, but problems could still remain.

According to Katie Stockton, the magnitude of the bounce will determine how much risk is still ahead for investors.

“If we don’t recover quite dramatically between now and the close on Friday, so just two days, we will see sell signals in our medium-term metrics,” said the founder and managing partner of Fairlead Strategies. CNBC. “And this will be the first time in months that we’ve had it.”

In a written comment, the technical analyst cited that the weekly Stochastic indicator, which identifies overbought and oversold conditions in the market, is at risk of an “overbought dip.”

Meanwhile, wrote that a sign known as the moving average convergence-divergence indicatoror MACD, could show its first sell signal since July. The MACD indicator tracks momentum and trends over various timeframes and is attractive for its clear verdicts, which go one of two ways: buy or sell.

Stockton wrote that once both indicators flash a sell signal for the S&P 500, investors should brace for a potential correction of 7% to 10% in the medium term.

By the way, it is not a fact that this happens. Although the benchmark index fell close 3% Wednesday after the Federal Reserve struck a hawkish tone at its meeting, the sell-off came just before the market entered a historically strong stretch.

“This comes at a pretty interesting time seasonally because we typically have the Santa concentration, which is the last five days of the year, the first two days of the new year, typically,” Stockton said. “So with a snapback, it might last until the end of the year, and maybe a little bit beyond that.”

Therefore, concerned investors should wait to see how sell signals play out in the medium term before hedging the exposure, he wrote.

Still, others see it too high correction risk. Market veteran Ed Yardeni expects stocks to remain “neglected” through January, citing profit-taking, a possible dock strike and a flurry of executive orders as Donald Trump takes office.

“We cannot rule out a 10% stock market correction, but we would see this as a buying opportunity and not a reason to exit the market as we do not expect a recession or bear market,” he wrote. on Thursday

Read the original article at Business Insider