SPX -What's next after historic drop?

$S&P 500(.SPX)$ suffered a huge drop of close to 156 points on Apr 29 close. All in all, it has dropped –13.3% from Jan 4 all-time-high (ATH) closing high of 4793.54, the worst start to the year since 1939 (see table below).

source: Compound Capital Advisors

So what’s in store for the Index, widely regarded as the barometer of the overall US stock market, this coming week?

More Volatility

First, I’d expect volatility to remain high ($Cboe Volatility Index(VIX)$ last closed, 33.4) given more S&P 500 constituent companies reporting Q1 earnings, FOMC Meeting Fed rates decision mid-week, and NFP April jobs numbers to round off a big week.

History Lessons

Historically, based on $SPDR S&P 500 ETF Trust(SPY)$, the one day drop of – 3.7% at end of the month was the second worst since 1990s (see table below first column). What happens the next trading day, in our case today May 2 (third column) is anybody’s guess unfortunately, although on average it looks less likely, but just by a little, to be positive (46.15% chance). Something to be optimistic about is there is close to 70% chance we will end the month of May in positive territory (Following month % Chg, last column)

source: Bespoke Investment Group

Trade the Price Action

In terms of price action, $S&P 500(.SPX)$ has been on a downtrend since ATH in Jan 2022 (see Daily chart below).

Daily Chart $S&P 500(.SPX)$

For upside scenario, price action shows a likely double bottom bullish pattern, which might give a bounce of potentially up to 85 points or about +2%, to 4200 round number level. However, price might drop below recent low of 4118.65 before rebounding. If the rally up has some legs, then next stop is likely around 4280, coinciding with 0.236 Fib level. $E-mini S&P 500 - main 2203(ESmain)$ index futures price is up around +0.4% at time of posting, and as price action has been respecting the Fibs levels well on Daily chart, there is a good possibility of an up day.

For downside scenario, price might break down (fake breakout) in regular trading hours (RTH) and fall further to 4080. As this level looks like a relatively weak support, price could likely drop all the way to 3960 (further –2.94% drop).

I’m ready for both scenario, and would trade based on price action, setting stops that are wider due to higher volatility.

Here's wishing you all a profitable trading week ahead.