- A bullish technical analysis pattern suggests that the S&P 500 could jump 7%, Bank of America said in a note on Wednesday.
- The inverted head and shoulders, a bullish continuation pattern, formed in the S&P 500 during the September selloff.
- If the S&P 500 manages to decisively break above neckline resistance of 3,430, a measured move price target of 3,640 would be in play, according to the bank.
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The S&P 500 is set to surge 7% from Wednesday’s end of trading if the index can manage to decisively close above the 3,430 level.
That’s according to Bank of America, who observed in a note on Wednesday that an inverse head and shoulders pattern has formed in the index.
The inverse head and shoulders is considered a bullish continuation pattern in technical analysis and is a mirror image of the bearish head and shoulders pattern.
The inverse pattern is made up of a series of three selloffs that typically occur during a period of market consolidation.
The pattern depicts an initial selloff, followed by a short-lived rally, followed by an even deeper selloff, followed by a short-lived rally, followed by one last selloff that finds a bottom near the same level of the first selloff.
The first and last selloffs represent the “left” and “right shoulder,” respectively, while the second (and deeper) selloff represents the “head” of the inverse head and shoulder pattern.
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Neckline resistance of the pattern represents the level where the short-lived rallies topped out. From there, technical analysts can derive a “measured move” target by measuring the distance from the neckline and the head formation, and adding that distance to the neckline, as illustrated in the chart above.
September’s 11% correction in the S&P 500 created the bullish inverse head and shoulders pattern, BofA said, adding that it “could signal the end of the seasonal correction for US equities.”
The S&P 500 marked its left and right shoulder around the 3,330 level, while the head is represented by the September 24 low of 3,209.
“We acknowledge that the current political and macro environment could negate this view, but if low 3300s hold on dips and the SPX clears 3430, it would confirm this bullish pattern with SPX upside to 3640,” BofA concluded.
The S&P 500 traded 10 points above the key 3,430 level in Thursday afternoon trades.