US Elections: Watching the Dow

As we approach US election day, it has been trickier than usual to identify trading opportunities. Although apparently the result of the election is heavily bet upon in wagering markets, the smart money has been reluctant to show its hand. Many of the currencies are in a large consolidation and do not provide for safe opportunities, although this may change in the two trading days left to the election result. For now, even the S&P looks unclear, but watching the Dow is beginning to prove interesting.

Table of Contents

  • How watching the Dow may provide a long opportunity

  • How to trade it

  • Be aware of a reversal and another trade

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Watching the Dow weekly chart is interesting

Figure 1 below shows the Dow weekly chart since circa 2016. The Trump era has been generally in an uptrend, albeit an extremely bumpy one. The key technical takeaway from this that a major rising channel was broken due to the Coronavirus. The price has since resiliently climbed its way back into the channel.

By watching the Dow, we can see if the channel holds up

What trend are we seeing?

The question now, with the election results approaching, whether this channel will hold? It is clear that in the past 24 hours, there has been significant selling, possibly in expectation of a Biden win.

Is the uptrend at an end?

The daily chart in Figure 2 shows a clearer picture. The price is performing what is potentially a complex retracement in an uptrend. Is the uptrend at an end? Some believe that a Democratic win will end the trend, and begin a downward move.

Watching the Dow means being able to spot a potential uptrend

However, we have no way to know that for certain. Thus it is better to trade as if the trend is still intact. The region of 24889-25944 forms potential support around the bottom of the weekly channel. With price accelerating towards this region, this is the zone from which the election price battle is most likely to be fought.

25579 is a level of particular interest, being the 1.272 projected termination of the ABCD pattern, although it is displayed mainly for reference. As long as prices touch the Blue Box, a long might be initiated on an appropriate trigger on the four-hourly chart.

Surf the correct wave

The four-hourly chart shows an aggressive Elliott wave approach towards support. We would wish to see the termination of wave 3, a small wave 4 and then a wave 5. This counting merely provides a guide, and is not entirely helpful for traders looking for a precise entry point.

An appropriate way to enter here would be to allow prices to touch the Blue Box, move upwards, even slightly, in a candlestick reversal (bullish engulfing, harami or pin bar) type move, and then head lower. We would skip the first move up, assuming that it is wave 4.

Watching the Dow... and the blue box

There is too much downward momentum to risk the first entry. On the second reversal pattern (i.e. the expected wave 5 termination), we would enter on a candlestick reversal pattern (the same - bullish engulfing, harami or pin bar).

Keep your eyes on the (blue) box

It is entirely possible that the election results will cause the entire Blue Box (see figure 3 above) to break down with no such reaction, although it is relatively unlikely. At least a small upward move should result, and if expectations are off-kilter, traders will be positioned for a roar to the upside.

It may be that the trade will trigger before the results are announced. The trigger is still valid and the trade can be taken. If it is stopped out and prices remain within the Blue Box, the trader might try one more time. A total of two attempts for this Blue Box is appropriate.

Keep an open mind to other opportunities

It is important to note that the point of this watching the Dow trade is to secure a position in the case of a long. An alternative trade may present itself to the short side in the next two trading days.

If this occurs, it will be on the lower time frames. There may be insufficient time to publish prior to the trade triggering. Either way, this is a historic moment, and traders will want to monitor it closely.

Further content from Kaye Lee can also be found on his website: Straight Talk Trading

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