Frank Longman On S&P Technicals: We're At The Midpoint Of The Correction

• Frank Longman, a technical analyst at Brean Capital, argued the market is only at the "midpoint" of the correction.
• Longman suggested we are in the midst of a "significant" correction of the bull market.
• Longman added the S&P 500 index could dip to the 1700s level before new highs are established.

Frank Longman, a technical analyst at Brean Capital, commented in a note on Monday that it has been more than four months since the S&P 500 index printed a new high. As such, the analyst believes that we are in the midst of a "significant" and "fourth wave" correction of the bull market that began in March 2009. Accordingly, the S&P 500 index may pass through the 1700's level before new highs are made. "We continue to believe that SPX 1730 has a magnetic pull in a "can test, could hold" kind of way," Longman wrote. "If we're right, 1730 would be a 38 percent retracement of wave three and, if it tests in Q4, there would also be potential support from the rising bottoms line which connects the 2009 and 2011 swing lows." Longman further point that the S&P index closed at 1931 on Friday which actually represents the mid-point between the 1730 level and May's high of 2134. What ‘Had Worked' No Longer Works Longman pointed out that during the period of October 2011 and October 2014, investors who had bought equities on a dip were rewarded as the market moved on to establish new highs. Investors who employed that strategy that worked in the past may find it no longer applies. "Put simply, the market was giving you what we call "trend following dip buys" on a regular basis," the analyst explained. "Lately however, buying dips has only worked if you buy a more profound oversold condition and even then it's only giving you mean reversion bounce trades to lower highs. We call these "counter trend dip buys" and they come with marginal reward to risk ratios." Longman added that the only trend that "matters" right now is the downward trend that began in May. Investors were warned that buying dips in the current market puts them in a "potentially debilitating position of being handcuffed to a hope trade." Bottom line, the analyst acknowledgment that an S&P decline all the way to 1730 "may sound like a lot," it still represents a "rehash of what the technical inputs have been telling us over the past few months."