Equity markets confirmed the prior week's buying exhaustion by reversing hard (to the downside) last week. As a result, both the S&P 500 and Nasdaq 100 indices have marked key reversal patterns. That said, Friday's volume didn't spike by that much and felt like more of a buyers' strike heading into the weekend than a panicky sell-off.

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 and 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.