The S & P 500 's choppy trading in recent months is falling into a pattern that could be bad news for investors, according to a Bank of America chart expert. Stephen Suttmeier, the bank's technical research strategist, said Tuesday in a note to clients that the market appears to be nearing the end of a "head-and-shoulder" trading pattern, which could mean a big drop is coming soon. A head-and-shoulders pattern involves three peaks in quick succession, with the first and third topping out near the same level, while the second one briefly trades above that level. Chart analysts believe that if the stock falls from the third peak, breaking below that trading range, it could lead to a large pullback. The S & P 500 is currently trading near 4,400 after trading around 4,600 a week ago, looking similar to a previous trading range from late November of last year — with a peak to roughly 4,800 in the middle. "A bearish weekly reversal on a failed attempt to clear resistance at 4495-4565 ... increases the risk for a 6-month head and shoulders top on the SPX. Staying below the shoulder peaks of 4565-4600 keeps this risky pattern intact," Suttmeier's note said. If the market index does fall below the right-side shoulder, the S & P 500 could fall roughly 10% before finding serious support, Suttmeier said. "A decisive break below the 4278-4222 area is the signal to confirm the head and shoulders top with deeper downside risk toward 4000 ... and even into the 3800s," the note said. To be sure, chart analysis and trading patterns are not a guaranteed way to predict what comes next in the market. But many professional traders rely on the charts to inform their moves, and some algorithmic trading firms incorporate the analysis into their programs.
Jorge Sanz | LightRocket | Getty Images
The S&P 500's choppy trading in recent months is falling into a pattern that could be bad news for investors, according to a Bank of America chart expert.
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