Bank of America warns of a hard landing if the S&P 500 drops below its 200-day average.
If the stock market falls below that threshold, there could be a 10% correction, BofA said.
Key sectors like semiconductors and Big Tech must hold their support levels to avoid further declines.
Investors can expect a hard landing in the economy if the S&P 500 drops below a key technical level, according to a Thursday note from Bank of America strategist Michael Hartnett.
Hartnett highlighted the S&P 500's 200-day moving average as a key line in the sand that would signal whether the economy is heading for a bigger downturn.
"Technical levels that would flip Wall St narrative from soft to hard landing have not been broken… 4% on 30-year Treasury, 400bps on HY CDX, 5050 on S&P 500," Hartnett said.
The 5050 level on the S&P 500 corresponds with the index's rising 200-day moving average. As of Friday, the S&P 500 traded at 5,317, or about 6% above its 200-day moving average.
"Important now for stock leaders SOX (4600) and big tech XLK (200) to hold 200dma levels… if levels break, traders then target 2021 highs (i.e. 10% lower)," Hartnett said.
The SOX Semiconductor Index and the XLK ETF both tested their 200-day moving average as technical support levels earlier this week during a surge in market volatility before bouncing higher again.
While the key technical support levels in the stock market have yet to be breached, Hartnett is wary in his outlook for the US economy and stock market.
For a soft landing to occur, a lot has to go right, including the Federal Reserve cutting interest rates and lower interest rates leading to a boost in investor sentiment.
But price action in certain areas of the stock market is not encouraging, according to Hartnett.
"Price action in biotech (longest duration equity) no bueno and no lift yet to US retail stocks (consumer discretionary at 12-year relative lows," Hartnett said.
Hartnett is sticking to his playbook of selling stocks after the Fed implements its first rate cut, which is expected to happen at its policy meeting next month.
"We remain in 'sell the 1st cut' camp," Hartnett said, adding that he sees growing risks in AI-related stocks as they race to show a return on investment from their massive GPU spending.
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