aderoy

S&P500 volatility: 8/10 chance of reversal in Nov 2020

Long
TVC:VIX   Volatility S&P 500 Index
It is election time in the US. The S&P 500 has seen some price corrections in the weeks prior to the Nov 2020 US election. So it's fair to take a look at how S&P 500 prices react in the weeks immediately preceding previous US elections going back to 2002/03.

I have used both the s&P 500 price chart and the S&P 500 volatility chart in this analysis.

The S&P 500 volatility chart shows the following:

1. Historically, there is a volatility hot zone / level of between 40 and 50
2. The S&P 500 price reversed 8 out of 10 ten times when when the S&P 500 volatility enters the hot zone ( 40 - 50)
3. The 2 other times this didn't happen were during the 2008/09 financial crisis and the March 2020 COVID-19 pandemic
4. In the 4-week period preceding the US elections, volatility were circa 55% in 2004, 43% in 2012 and 88% in 2016. Volatility in the 4-week period prior to the Nov 04 2008 US Election is discounted due to 2008/2009 financial crisis
5. In the 4-week period preceding the Nov 03 2020 US election, volatility is 85%. This is within range of the previous 3 election cycle mentioned above.
6. Given (5) above, we expect the current pre-election S&P sell-off to bottom out and prices continue to rise post-election (assuming that there aren't mid-election and post-election crisis, which is likely given that President Trump has not categorically ruled out peaceful transfer of power if he looses the election)

The S&P 500 chart shows the following:
1. Prices are in a very important zone (price level of between 3200 and 3395)
2. Given analysis of the S&P 500 volatility chart above, there is a 80% chance that price will recover higher than close of price level of 3286 (as at close of 30 Oct 2020)
3. However, if the S&P 500 price level of 3200 is broken, there is a chance that prices might retest this level (3200 support now becomes resistance) and prices will continue to fall further.

Summary
1. The S&P 500 price is now in the hot zone (3200 - 3395).
2. Barring any unexpected events, there is 80% chance that the S&P 500 prices level will move up in the following weeks ahead post-election.
3. Conversely, there is a 20% chance that the S&P 500 price level will plummet if it breaks the 3200 level in the following days/weeks.

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