The S&P 500 needs to clear 3 big hurdles to convince investors the bull market has returned, Bank of America says

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• The S&P 500 has three technical levels to clear before signaling to investors that a new bull market is here, according to BofA.
• The bank said the S&P 500 holding support at 3,900 is a bullish sign that confirms its recent breakout.
• "The day-to-day market chop reacts to nearly every headline, so it's hard to maintain bullish (or bearish) conviction," BofA said.

The stock market has a lot of work to do to prove to investors that a new bull market rally can materialize and be sustained heading into 2023, according to a Monday note from Bank of America.

BofA analyst Stephen Suttmeier is monitoring three key technical levels that currently serve as an important resistance target for the S&P 500. If the market can clear these hurdles, it would be a signal to investors that a new bull market has arrived following a nearly year-long long cyclical bear market.

Those three breakout levels include 4,051, which currently represents the 40-week moving average, 4,109, which represents the well-established 2022 downtrend line, and 4,325, which represents the high made in August. The S&P 500 traded just above 3,950 in Monday's session.

If the S&P 500 fails to trade above these three resistance levels, it would signal to investors that the rally since mid-October is nothing more than a bear-market rally as the benchmark index continues to put in a series of lower highs and lower lows.

One encouraging sign is the S&P 500's ability to trade above its 3,900 breakout level, according to Suttmeier.

"The day-to-day market chop reacts to nearly every headline, so it's hard to maintain bullish (or bearish) conviction. That said, the SPX held its breakout above 3900, which supports the case for a rally into yearend, but breaking above key levels has proven elusive thus far," Suttmeier said.

If the S&P 500 fails to clear its upcoming resistance, which remain as far as 10% away from current levels, then investors should prepare for more downside, according to Suttmeier, with the potential for the index to retest its recent low at 3,491. A decline to that level represents 12% downside.