- The ongoing rebound in the
stock market can continue if certain technical indicators improve, Bank of America said. - The bank is eyeing upward moves in the Advance-Decline line to confirm the ongoing rally and signal more upside ahead.
- These are the three technical indicators Bank of America is monitoring to gauge if the current rally will continue.
The S&P 500 has staged a 9% rally from its May 20 low, and now investors are wondering if this is just a bear market rally or a sustainable bounce that could ultimately end the current downtrend and lead to new highs in the stock market.
In a bid to guess what might happen next, Bank of America is monitoring three key technical indicators to gauge if the current stock market rally has more gas in the tank, according to a Monday note from analyst Stephen Suttmeier.
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Suttmeier is looking for similar setups in what he believes are three key indicators traders and technical analysts should be monitoring, according to note. If the indicators make bullish upside moves, the S&P 500 could rally as much as 7% from current levels to 4,445, according to Suttmeier.
These are the three indicators to watch:
1. A breakout in the Advance-Decline line.
"The US top 15 most active A-D line needs to break out above 3123 to precede or confirm a continued US equity market rally. A double bottom for this breadth and volume indicator confirmed a double bottom for the SPX from the May lows. Prior to this improvement, a breakdown to new YTD lows on the most active A-D line in late April preceded new YTD lows on the SPX in mid- to late-May," Suttmeier said.
The A-D line helps investors measure the number of individual stocks that are participating in a market rise or fall, also known as breadth.
2. A breakout in the percentage of stocks above their 50-day moving average.
"The percentage of SPX stocks above 50-day MAs formed a double bottom that confirmed a double bottom for the SPX in May. A breakout for this market breadth indicator above 46.3-48.7 would favor a continued rally for the SPX, in our view," Suttmeier said.
3. A breakout in the 3-month VIX contract relative to the VIX.
"The late April into May bullish divergence for the 3-month VIX relative to the VIX is the biggest since March 2020. This divergence preceded the late May rally, but we would have more confidence in a continued tactical rally for equities on a breakout above 1.10-1.11 on the VIX3M/VIX," Suttmeier said.
If these signals fail to make the bullish upside moves Suttmeier is monitoring for, investors should expect the S&P 500 to retest its May 20 low of around 3,800, representing potential downside of 9%. And if that level fails to hold as support, Suttmeier expects the rising 200-week moving average near 3,500 to represent an important support level, representing potential downside of 16% from current levels.