• Two key technical levels in the S&P 500 should be on the radar for all stock market investors in 2021, according to a Monday note from Bank of America.
• Critical support for the index in 2021 stands at 3,200, representing potential downside of 12% from Monday's close, BofA said.
• But secular trends and a bullish cup-and-handle technical analysis pattern suggest the S&P 500 could surge past 4,000 next year, representing potential upside of more than 10%, according to the note.
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US stocks have been on a wild ride in 2020, with a 35% peak-to-trough drawdown in the first quarter followed by an almost 70% rally to new all-time-highs.

Looking to 2021, the evidence remains bullish for stocks to continue their long-term trend upward, according to a technical analyst note from Bank of America.

"Broadly positive trend, breadth, seasonality, volume, credit, momentum and macro indicators support continued upside into 2021," BofA's Chief Equity Technical Strategist Stephen Suttmeier said.

And the move higher in the Dow Industrials and transportation stocks during the second half of 2020 confirms a bull market is on solid footing, according to Dow Theory.

BofA outlined two critical levels stock market investors should have their eye on next year.

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"Big 2021 Support"

First, critical support in the S&P 500 of 3,200. A move to that level from Monday's close would represent downside potential of 12%. A brief correction in stocks in the fall tested the 3,200 range, which served as a bullish retest of the breakout in stocks over the summer.

"The 3,200 area, which is backed up by the rising 200-day moving average near 3,170 is a big support [level] on a deeper 2021 correction," BofA said.

"Secular bull market points higher"

The second factor is upside potential. Specifically, BofA has its eyes on 4,000 in the S&P 500, which would represent potential upside of 10% from Monday's close.

Supporting that potential move higher includes positive seasonality data and a bullish cup-and-handle breakout.

"Historical data suggests that the year after a year with a 10%+ drawdown tends to have stronger returns in the following January, 1Q and for the entire year," Bank of America said. This seasonality trend could continue in 2021 given the 35% sell-off in stocks in 2020.

And based on presidential cycles, Joe Biden stands to preside over a strong showing for stocks in his first year as president, according to the note.

"First term year 1 cycles show an average return of 7.1%. Democrat first term Year 1 cycles have an average return of 11.4%," BofA explained.

Finally, a cup-and-handle technical analysis pattern led to a breakout in the S&P 500 over the summer. The measured move target derived from this pattern is 4,270, representing potential upside of 17% from Monday's close.

"The COVID-19 correction in March and rally into June market the cup and the June consolidation formed the handle of this bullish trend continuation pattern," said BofA.

While BofA admits it may take until 2022 until this price objective is reached, they did not rule out the possibility of the S&P crossing 4,000 and moving towards that level in 2021.

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