HSBC: RED ALERT - Get ready for a 'severe fall' in the stock market

HSBC's technical analysis team has thrown up the ultimate warning signal.

In a note to clients, Murray Gunn, the head of technical analysis for HSBC, said that he is now on "RED ALERT" for an imminent sell-off in stocks given the price action over the last few weeks.

Gunn uses a type of technical analysis called the Elliott Wave Principle, which tracks alternating patterns in the stock market to discern investors behavior and possible next moves ($4).

In late September, Gunn said the stock market's moves looked eerily similar to just before the 1987 stock market crash. Of note, Citi's Tom Fitzpatrick also highlighted $4 just a few days ago. Then on September 30, Gunn said stocks were under an "orange alert" as they looked as if they had topped out.

And now given the $4 on Tuesday, Gunn said that the drop is here.

"With the US stock market selling off aggressively on 11 October, we now issue a RED ALERT," said Gunn in the note. "The fall was broad-based and the Traders Index (TRIN) showed intense selling pressure as the market moved to the lows of the day. The VIX index, a barometer of nervousness, has been making a series of higher lows since August."

Gunn said that if the Dow Jones Industrial Average falls below 17,992 or the S&P 500 dips under 2,116, the selling would truly set in. The Dow closed at 18,128 on Tuesday, while the S&P settled at 2136.

"As long as those levels remain intact, the bulls still have a slight hope," said Gunn.

"But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast. The possibility of a severe fall in the stock market is now very high."

Watch out.