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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