Stocks setting up for big upside reversal: Technician

Stocks sold off for the third day in a row Thursday, with the S&P 500 tracking for its worst quarter since 2011. However, one technician says the large-cap index could be setting up for a big reversal to the upside.

Technical analyst Rich Ross of Evercore ISI said the SPDR ETF that tracks the S&P 500, commonly known by its ticker symbol SPY, is showing some bullish signals.

Ross is watching four key levels in the SPY, which he said has potential upside to $206, a 7 percent gain from its Thursday close. First, the SPY hit a pivot level Thursday, when it tested the September lows around $191, Ross said.

"[This] is a sign of trend exhaustion coming off the top, so I would view this formation as a bullish reversal pattern," Ross said Thursday on CNBC's "Trading Nation." "The fact that that reversal occurs at this key support ... I think that set the S&P up for another move to the upside."

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After a support line at $192, the next level would come in around $200, Ross said, which also acted as resistance for the SPY before the September Fed meeting. If the ETF breaks through $200, it could also go back above its 50-day moving average at $202.

Finally, Ross said the ETF could return back into its trading range before the stock market plunge in August above the $206 level.

However, Ross said stocks could see some more volatility before the SPY reaches back above its 200-day moving average.

"Let's take this move one step at a time. In the meantime, let's hold that $192 and see where we go from there," Ross said.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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