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 (more details here).

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 the market's similarities to the 1987 crash 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 200 point decline for the Dow 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.