This technical analysis pattern suggests the S&P 500 could jump 30% from current levels, according to BofA

  • Despite September's correction in the stock market, the long-term technical setup for further upside is intact heading into the November election, according to Bank of America.
  • Based on a completed "cup and handle" technical analysis pattern, the S&P 500 could rise to 3,700 to 4,300, representing potential upside of 12% to 30% from Friday's close, BofA said.
  • Encouraging margin debt data suggests that the current market sell-off is a seasonal correction, and not a long-term top, according to BofA.
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The September correction in the stock market should be viewed as a seasonal correction, and not as a long-term top, according to Bank of America.

In a technical analysis note on Monday, BofA said investors should continue to hold on for potential upside in the S&P 500 heading into the November election.

Specifically, a completed "cup and handle" pattern suggests the S&P 500 could rise to 3,700, representing potential upside of 12% from Friday's close. Additionally, a longer-term target of 4,300 is also derived from the technical analysis pattern, representing 30% upside from Friday's close.

"SPX 4300 is an aspirational upside count, but one that is achievable based on the bullish breakout, positive backdrop signals and our secular bull market roadmap," BofA said.

A cup and handle is a bullish continuation pattern that is best defined as a sell-off in a security, followed by a recovery back to the highs seen prior to the sell-off, followed by a mild correction. From there, the security is set to move higher if it breaks above the handle correction level.

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In this case, the highs seen in February, the ensuing COVID-19 induced sell-off, and the eventual recovery in stocks would represent the "cup" of the cup and handle pattern. The mid-summer correction in stocks would then represent the "handle" of the pattern.

As long as the S&P 500 holds on to the range of support found at the 3,000 to 3,200 level, the bullish cup and handle pattern is intact.

Meanwhile, encouraging margin debt data has confirmed the recent uptrend in stocks, according to BofA. Investors are borrowing more to participate in the upside move in stocks, with FINRA margin debt rising in July and August, confirming the summer rally.

"The margin debt growth rate has begun to outpace the SPX in 2020. This suggests that investors have gotten confident enough to take on leverage," BofA noted.

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