Bank of America sees S&P 500 falling below 4200 before a year-end rally

The ended the last week lower, therefore recording the fourth consecutive red candle on a weekly basis.

Analysts see more downside room for the index as we enter the final quarter of the year, however, many of them also advocate for a year-end rally in the S&P 500.

“The breakdown below 4335-4325 is bearish entering October and suggests risk on the SPX to the 4200 area (rising 200-day MA, June breakout point and 50% retracement), which means that we favor an undercut of last week’s low at 4238,” Bank of America analysts wrote in a client note.

They also flagged 4375-4402 as the next resistance zone for the S&P 500, while the next major support level is 4114.

Here is why the analysts see the S&P 500 as well-positioned to deliver a year-end rally.

“We think 2023 is like other bullish turns in 2020 (COVID-19), 2019 (China trade war), 2016 (Brexit and Trump elected) and 2012 (Eurozone crisis). Corrections from summer peaks into November 2012, November 2016 and October 2019 tested/undercut the rising 40-week MA and preceded yearend rallies in those years. The late 2023 setup resembles those from late 2012, late 2016 and late 2019. This suggests that a test or undercut of the 40-week MA could precede a yearend rally,” they added.

For the year-end rally to happen, the analysts would first like to see a capitulation event.

“Given October’s reputation for big intra-month drawdowns, we believe that an oversold capitulation event on a move below 1.0 for the VIX3M/VIX is more likely in October. This is likely a key ingredient ahead of a yearend rally for the SPX.”