Pressures from the ongoing war in Iran appear to be subsiding, yet investors may face a challenging summer ahead, according to recent insights from Bank of America. Technical strategists at the bank have identified a series of indicators suggesting that the S&P 500 is approaching a corrective phase that could extend into the third quarter. They predict what is termed an “abc correction,” characterized by a decline occurring in three distinct waves.
Bank of America cautions that the future trajectory of the S&P 500 may resemble a “three-wave correction,” with potential double corrections observed. This analysis comes from a team spearheaded by Paul Ciana, the bank’s global head of technical strategy, who emphasized caution regarding a possible new high near the 7,741 mark. Such a scenario could function as a “bull trap,” suggesting that heightened optimism may lead to subsequent declines.
The strategists forecast a transitional period for the S&P 500 in the third quarter, likely resulting in a “sideways-to-lower” trading pattern. In a more pessimistic outlook, they project that the S&P 500 could plummet to around 6,850, representing a possible 6% decline from current levels.
Ciana’s team has identified three critical warning signs signaling potential volatility in the stock market:
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Diverging Momentum: Analysts observe that the S&P 500’s momentum is diverging, where asset prices are increasing, but at a slower pace than suggested by momentum indicators like the Relative Strength Index (RSI). Currently, the S&P 500’s 14-day RSI is cooling off from previous highs, registering around 49.
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“Red 13” Exhaustion Signal: The strategists highlighted a “red 13” exhaustion signal from the TD Sequential, a technical analysis tool that indicates when a stock trend may be reaching its peak. The S&P 500 displayed this signal on June 1, suggesting that its rally might be running out of steam.
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Fourth Wave Transition: Utilizing the Elliott Wave Theory, the team indicates that the S&P 500 has entered the fourth wave of its cycle—a small pullback preceding the final stage of the market cycle. After trading around 7,334 on June 10, this level is considered a significant marker; a drop below it would further affirm the onset of a corrective phase.
Despite the anticipated fluctuations leading into fall, Bank of America’s strategists maintain a bullish outlook for the markets overall. They foresee a potential recovery in the fourth quarter, possibly culminating in a “Santa rally” by year-end.
Recent trends have sparked skepticism regarding the durability of the bull market. As significant gains made by tech stocks come to a halt, the Nasdaq 100 has seen a notable downturn of approximately 4% in the past week, with tech giants like Broadcom, Nvidia, and Intel experiencing considerable declines.
