A trifecta of bearish factors could send stocks lower by about 10% within the next few weeks, according to Renaissance Macro Research founder and technical strategist Jeff DeGraaf.
In an interview with CNBC on Wednesday, DeGraaf said the Nasdaq 100 could trade to 17,000, a key technical level he is monitoring which represents 10% downside from current levels.
For the S&P 500 , DeGraaf is closely watching the early August low of 5,120 for a potential retest of support. That level represents about 7% downside from current levels.
DeGraaf is concerned that sentiment remains in bullish territory, which isn't typically seen when the market is at or near a bottom.
"When we look at where the sentiment is in terms of small speculators on the NDX futures, they're still very very net long. In other words, they've been using this weakness as a buying opportunity. And that's not usually the right behavior to create some kind of low," DeGraaf said.
The S&P 500 is about 3% below its record high, while the Nasdaq 100 is down about 8%.
The bullish sentiment among traders is also contrasted by the fact that September has historically been a bad month for stocks.
Finally, DeGraaf said that technology stocks, which have been leading the market higher since the bull market started in October 2022, typically underperform in the three months following the Federal Reserve's first interest rate cut.
"When we look particularly at technology, it does not fare well after the first rate cut. It's very pro-cyclical, cyclicals tend to underperform for at least three months after the first Fed rate cut," DeGraaf said.
"So even though it feels like the calvary is on the way and good things are likely to happen, the data probably continues to be weaker and I think that's one of the things that's kind of piling up on us here."
As to how the decline plays out, DeGraaf said there could be further weakness toward the end of September, spilling over into early October.
Such a decline would create a two-month window of stocks seeing little movement, which can "become pretty disheartening for people," DeGraaf said.
Another potential decline could come in the form of a quick flush of positioning among trend followers and "sheer panic" among investors, similar to what happened in early August amid the yen carry trade blowup.
Until one of those two things happens, DeGraaf sees short-term stock market risks skewed to the downside.
"Neither one of those have we seen yet and that's why we think there's still a little longer fuse on this correction that's likely to take place before we're done," DeGraaf said.
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