S&P 500 price forecast after dropping 400 points from the highs

The S&P 500 index had a rough start of the trading year – already down more than 6% in the first three trading weeks. So what to expect next from a technical and historical perspective?

The trading year started only three weeks ago, and the S&P 500 index, viewed by many as the benchmark for the overall equity markets, is down more than 6%. A rough start, one may say, but where do we go from here?

Nothing new happened since the index made a new all-time high right at the end of 2021. After all, the Fed was known to taper and to start raising rates in March 2022, but that did not stop investors from buying equities.

Also, the omicron fears (i.e., the concerns triggered by a new COVID-19 variant) faded away. As a result, the impact on economies and their health care systems was not as heavy as initially believed, and now many countries consider lifting their restrictions.

Yet, the S&P 500 is down 400 points from the highs. So is this the time to buy the dip, or is it just the start of a more significant correction?

The technical picture calls for caution

A quick look at the technical picture reveals no real damage despite the abrupt selling. Indeed, the market dropped below an area that acted as support previously.

However, the series of higher highs and higher lows remains intact. As marked on the chart above, the key level is yet to be broken.

And even if bears push the index down so far, the major support area remains at 4,000.

What does historical data tell us?

Can the market take another 400 points dive and still deliver positive returns? It depends on a few factors, such as the time horizon.

To exemplify, next March, the Federal Reserve is forecast to raise the interest rate for the first time since the COVID-19 pandemic has started. While higher rates are generally detrimental to stocks, history tells us that bull markets go another three years after the first Fed hike.

Another thing to consider is that 2022 is a midterm elections year. The average midterm year since 1950 has a drawdown of 17%. Hence, there is still more room to go to the downside, but buying the dip might not be the worse decision considering what happens after the first Fed hike.