Don’t Trade On Pure Technicals The Coming Days

With the U.S. election just hours away I have received a dozen or so emails asking me how folks should trade the market these next few days.  In short, unless you must trade by mandate or have in incurably itchy trading finger it might be best to just sit out and let the elections come and go before putting hard earned money at risk.

As I often state, technical analysis in my mind is best used for pin-pointing reference levels rather than blindly trusting any given indicator.  This becomes immensely more important when we enter periods of significant uncertainty such as in this case a presidential election.  And so I’ve said it, fundamental analysis too will be of very limited use for the coming days.

Instead of analyzing stacks of statistics on stock market reaction to the past dozen elections I will simply expect the unexpected and realize that especially in a race this close markets could well trade volatile or at least in a choppy range up until a couple of days post the election results.  For most traders and investors there should be no rush to trade the election results or even worse so any prediction statistics.  Markets will offer plenty of higher probability setups once the dust settles a little.

And remember, what matters more is the reaction to the news than the news itself.

From a risk management point of view understand that in the near-term there are simply too many factors at work to allow for real high-probability trading setups in the major U.S. stock indices.  This type of environment thus leads me to go back to the basics and understand what the broad-stroked trend in the S&P 500 is so as not to forget it during the potentially choppy days ahead.

A look at the sectors that make up the S&P 500 shows them in a consolidation phase at present.  None of the sectors are showing any major damage although utilities are under relatively more pressure, which however all else equal is more bullish cyclical sectors and thus the broader market than a negative tell for the broader market.

The S&P 500 index itself thus too is so far simply consolidating some of the large gains since June.  Next support levels are near 1395 and 1370, which are the 38.2% and 50% Fibonacci retracement levels respectively of the June – September rally.

So for the coming days please keep in mind that most analysis, be it fundamental or technical will be of limited use until the election results have had time to sink in. Until then remember the broader patterns of the S&P 500 and try not to follow every tick, headline, or rumor.




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