Why the stock market will drop 7% by mid-November, according to a technical analyst

• The stock market could face a 7% correction by mid-November, says Fundstrat's Mark Newton.

• Investor complacency and weak seasonals could trigger decline, according to Newton.

• He views any potential pullback as a "buy the dip" opportunity.

The stock market looks poised for a 7% correction by mid-November, according to technical analyst Mark Newton of Fundstrat.

Newton told clients in a note on Thursday that he is expecting the S&P 500 to see weakness heading into November as investor sentiment hits complacent levels just ahead of the general election on November 5.

"While intermediate-term bullish these remains very much intact, it's doubtful that US Equities continue to push up into and post-election without any consolidation," Newton said.

Newton said the potential correction he expects in the stock market is likely to be a "short-term correction only" and "not the start of a larger decline," playing into Fundstrat's Tom Lee's consistent message that investors should view any decline in the stock market as a "buy the dip" opportunity.

Newton is monitoring the 5,900 level on the S&P 500 as potential resistance for the index. The S&P 500 traded at around 5,850 on Friday.

"The issues with near-term complacency (as judged by low Equity put/call levels), waning breadth, poor seasonal trends and cyclical projections for November as well as SPX's largest sector, Technology, not performing well of late, are all reasons to be alert for possible trend change in the weeks to come," Newton explained.

One "key reason" Newton is turning bearish in the short-term is that the current rally in stocks that started in early August is 88 days long, which is exactly how long the April 19 to July 16 rally lasted before a sell-off materialized.

From a time perspective, that's "why this rally might 'run out of steam," Newton said.

Other areas of technical weakness that Newton is monitoring includes negative divergences in momentum as measured by the RSI and the moving average convergence divergence (MACD) indicators, a lack of bearish investors as measured by the AAII investor sentiment data, and seasonal cycles that show a peak in the stock market in mid-to-late October followed by a sell-off through November.

"This market has seemingly 'dodged a bullet' thus far during one of the historically worst periods during most election years. However, investors should not take this to mean that the coast is clear for an interrupted rally higher all year," Newton said.

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