Typically, bull campaigns of this magnitude tend to finish with some sort of climactic, high volume, blow-off move. This, of course, is not what happened. Instead, as mentioned, equities left behind both a daily and weekly bull exhaustion (heading into the previous weekend) that failed to follow-through at the start of last week. Then, coupled with the fact the Dow Jones Industrial Average was over 3 standard deviations above its 200-day moving average for the first time ever, and that the S&P 500 was at historic levels of overbought conditions (weekly RSI), and you have makings of a perfect storm or in this case, a classic corrective pullback.
It should be noted, however, that similar to the start of last week, that this week the markets open with the exact same situation, starting a new week after both a daily & weekly exhaustion closed into the weekend. Except, this time, however, it comes on the heels of a strong (bearish) reversal signal. Also, strong trends tend to end counter-trend movement in a quick, exhaustive-type manner, and this correction does indeed fall into that category. That said, if there's no sign of a hesitation to start the week, or in other words, if it looks like equities are not immediately stalling-out come Monday, then it looks like markets could correct quite a bit further given the length of time it has been since we saw a 5% correction.
In these situations, markets tend to overshoot because there's often an emotional component associated with sell-offs, but this type of sentiment has clearly not happened thus far. In fact, on Friday, market participant after another (on TV) echoed their complacency, reiterating the fact that this was a well-needed pullback. This sense of resolve can work both ways, however, which again points to the importance to this week's opening price-action.
So, where do markets go if indeed there's a continuation to last week's (bearish) outside reversal pattern? The most logical answer is where the last drive that re-accelerated the uptrend begun, which occurred at the very start of the new year. A corrective (down) move of this variety would also correlate with a decline back down below 25,000 for the DJIA and roughly 2665 & 6400 for S&P 500 and Nasdaq 100 futures respectively.
This would also fit nicely with Gann retracement theory, which suggests that full-fledged reversals retrace 50% of the original move and corrective pullbacks typically retrace one-quarter of the original move. A 25% retracement of the entire move from the so-called "Trump low," which took place when Donald Trump was declared president back in early November 2016, lines-up perfectly with the aforementioned 2665 for S&P 500 futures and 6400 for Nasdaq 100 futures.
