With the U.S. election results less than two days away, market participants are bracing for what could at least in the short term amount to a significant volatility spike not dissimilar to that we witnessed in late June following the Brexit vote. As such, it is not surprising that last week I received a boatload of inquiries as to what the S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — may do following the election results.
Here are the levels I am watching.
Each time financial markets brace for a big news event, market participants in my observation have a strong propensity to overcomplicate things. There may be a thousand ways to ‘hedge’ or otherwise prepare for volatility spikes, but the perfect hedge or trade is rarely found.
Much like trying to capitalize on an earnings announcement, I find that the higher probability around the U.S. election results will most likely set up once the initial reaction to the news has taken place and the dust has settled somewhat.
Sure, some day-trader friends of mine are planning on staying up all night Tuesday into Wednesday morning and trading each turn in stocks, commodities and currencies. This may end up being profitable for some, but it is more likely that the vast majority of those traders only come away from this with a sleepless night and possibly some losses in their portfolio.
Three weeks ago, when the SPY ETF was trading a couple percentage points higher than it is now, I highlighted to my Clubhouse members that the the implied volatility of options on the S&P 500 — as represented by the CBOE Volatility Index, or the VIX — is likely much too low heading into the election uncertainty. Since then the VIX has spiked about 70% (using last Friday’s closing levels).
SPY Stock Charts
In other words and in my opinion, at least in implied volatility terms, a good part of the risk aversion move has already taken place and thus bidding up option premium in the SPY ETF at these levels may no longer be the best trade, at least not in significant size.
For some perspective, let’s note that the SPY through the multiyear weekly chart does remain within its 2009 up-trending channel and in fact currently is nestled right in the middle of it.
Considering that both economic data and corporate top and bottom lines continue to slow year over year I find it unlikely that the S&P 500 would miraculously blast to fresh all-time highs following the election, regardless of which candidate wins or what the congress looks like.
I would, however, look to buy into further weakness in the SPY as a way to play a potential year-end lift, particularly if the SPY should drop back to the lower end of this trading channel, i.e. toward the $200 area or a little lower.
On the daily chart, we see that the SPY ETF as of Friday’s close has reached its red 200-day simple moving average for the first time since late June and that this also coincides with the diagonal black line, which previously acted as resistance. This morning we are seeing a bounce in risk assets but I do not think this is something to react to for now.
Given that I do not want to chase the SPY higher should it pop following the election, I am focusing on what the next better support levels are where I could try to buy it for a trade and possibly into year-end.
If and when the SPY ETF pushes below its red 200-day moving average around $208.50, next better support is around $203.30, which lines up with horizontal support as well as the bottom of the thus-unfilled up-gap from June 29. Below there next support is around $200, which is near the late June lows and the 50% retracement of the entire rally off the January/February lows into the August highs.
As a third potential area of support I see $195-ish, which is a 61.80% Fibonacci retracement of said February to August rally.
Any strong bullish two- or three-day reversal off any of these levels would get me long the SPY for the first time in about six months, for a trade and possibly for a year-end rally.
Like what you see? Sign up for our daily Beat the Bell e-letter and get Serge’s investment advice delivered to your inbox every morning! Download Serge’s Free Special Report: 6 Keys for Successful Trading and Investing.
