S&P chart pattern points to breakout ahead, technician says

A string of sell-offs in the past week has taken the S&P 500 down to critical levels.

The index has dropped nearly 3 percent in one week, taking out its longer-term 200-day moving average.

One technician now sees signs that a bounce could be coming.

"The thing that's been driving me is sentiment. Everyone I'm speaking to is so bearish that it forces me to take a pause here," Todd Gordon, founder of TradingAnalysis.com, said Thursday on CNBC's "Trading Nation."

One chart formation in particular, the inverse head and shoulders, has Gordon feeling bullish.

"This inverse head and shoulders, you get a test, you get a lower low, you get a higher low, sellers try to punched it this [Thursday] morning, they couldn't," said Gordon.

The inverse head and shoulders pattern typically suggests a downtrend is about to end as the price breaks through previous resistance levels.

"The resolution appears to be on the topside. The breakout is going to be right through that double top up here and if that happens, I think volatility might be over, I think this was just a scare, so I like it, I'm long and I'm going to continue to add longs," said Gordon.

The longer-term S&P 500 chart suggests the upward trend is still intact, said Gordon. He said the S&P 500 has managed to stay within its upper trend channel and above its 200-week moving average, both bullish signals.

Gina Sanchez, CEO of Chantico Global, said the recent sell-offs have unlocked value in the market that should bring the bulls back.

"For a time it was very overvalued, but, in fact, we're starting to get into attractive territory for some stocks, not all," Sanchez said Thursday on "Trading Nation." "There are going to be buyers in this market at these valuations."

The S&P 500 trades at 15 times forward earnings, down from a 17 times multiple just two months ago. Its price-earnings ratio hit a peak of 18.7 times earnings in late January.

"If we can get some added certainty you could actually see some support coming back into the market," added Sanchez.

Correction: An earlier version of this article had a graphic with incorrect data.

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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.

Follow Michael Santoli on Twitter @michaelsantoli

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