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.