Bank of America strategists are flagging a series of technical signals that indicate a potential "three-wave" stock market correction may be developing for the S&P 500. The technical team at BofA, led by Paul Ciana, has identified multiple warning signs suggesting the index could enter a corrective phase through the third quarter. This projected correction is characterized as an "abc correction," a pattern involving three distinct downward price movements.
The strategists noted that the market may be experiencing a "bull trap" if a marginal new high occurs around 7,741. BofA's analysis suggests the S&P 500 could experience a sideways-to-lower trend, with a potential downside target as low as 6,850 during this corrective phase, representing about a 6% drop from recent levels. This warning aligns with broader market concerns about weakening breadth, where fewer stocks are participating in the rally, and diverging momentum signals, indicating a potential loss of conviction among investors.
Several technical indicators are contributing to this outlook. These include the S&P 500 breaking the floor of its rising trend channel, suggesting a weaker initial rising rate and approaching support levels. The Relative Strength Index (RSI) is also showing negative divergence against price, which is considered a risk of a downward reaction. While some analysts view the short-term technical picture as positive, the aggregate technical indicators are pointing towards increased caution. Bank of America's own Bull & Bear Indicator has also remained in "sell territory" for several weeks, historically preceding stock declines.
The current market environment, marked by strong performance in technology and AI-related stocks, has masked underlying weakness in broader market participation. This concentration risk is a key concern for strategists, who favor selective stock picking over broad index investments. Investors are advised to monitor these technical signals closely as the summer progresses.
