Price Action Setups Ahead of the U.S. Presidential Election
- Today finally brings the U.S. Presidential Election and markets will likely be eerily quiet in anticipation. Traders need to exude extreme caution here as liquidity will likely be low as results begin to come-in later tonight.
- Tonight’s election could possibly bring ‘Brexit-like’ price action, in which prices jump throughout the evening as results from various states come-in, swinging probabilities as each data point becomes known. Again, extreme caution is a necessity here as liquidity will likely be low and this could increase the potential for erratic price movements.
After months of banter it is finally here: U.S. Presidential elections are taking place today. And while the world is probably excited and/or scared to find out who the next new leader of the United States will be; the results of tonight’s election may not be known until very late in the night, or perhaps early tomorrow morning. If you want a breakdown of how the election works, and when each individual state reports results,Chris Vecchio outlined the context of today’s election in his morning article.
Given that voters will be marching to the polls for most of today, we’re likely going to be looking at relatively quiet markets until results begin to trickle-in at around 7PM Eastern Time. And much like we saw during the Brexit referendum, as results come-in we’ll likely see markets price-in that new information as odds and probabilities for tonight’s ultimate winner become more well-defined.
But given price action over the past two weeks, we can probably get a decent idea for how prices might move depending on which candidate pulls into the lead. As of a couple of weeks ago, it was largely assumed that Hillary Clinton was the front-runner. And then the Director of the FBI, James Comey, re-opened the investigation into her emails, bringing a near-instant hit to her poll numbers. But as this happened and as the world factored-in a higher probability of a Trump presidency, we saw the U.S. Dollar sell-off along with U.S. Stocks; Gold prices popped higher and Oil prices sank lower.
And then over this most recent weekend, Mr. Comey made another statement indicating that no additional charges will be levied on Secretary Clinton. As soon as markets opened, we saw those same areas that were selling off re-strengthening; and this can deductively give us an idea for which areas or markets might be most interesting behind each candidate.
The S&P 500
Coming into yesterday, the S&P 500 had just experienced its longest sell-off in over 30 years after having sold off for nine consecutive days. But after the weekend news that no additional charges would be levied on Secretary Clinton, price action burst-higher and wiped away losses from the six previous trading sessions in one single day.
But be careful of assuming huge gains in the S&P in the event of a Clinton win, as yesterday’s rally could’ve included a decent amount of short covering after the nine-day spill. Perhaps more to the point, a Clinton win was largely assumed as of a couple of weeks ago, and the S&P was still facing challenges around resistance.
This could be an area with an asymmetric type of setup, in which the downside may be considerably more aggressive in a Trump-win scenario than the up-side may shine with a Clinton-win outcome.
The US Dollar
News of the FBI’s re-opened investigation came mid-day on Friday, October 28th. That’s right around the time that a strong U.S. Dollar up-trend began to reverse aggressively before spending most of last week moving lower. Much like we saw in the S&P yesterday, the U.S. Dollar rallied for much of Monday’s price action as three days of losses were wiped away by one really strong day worth of movement.
A Clinton-win scenario probably means a higher-probability of the Federal Reserve staying ‘on track’ for a December rate hike. Donald Trump brings a rather large question mark here, as he’s previously called out the Federal Reserve for their easy money policies while also talking up the benefits of currency weakness. So, nobody really knows what to expect – and when that takes place in markets the general response is usually one of risk aversion.
Gold loves uncertainty, but perhaps even more, Gold loves weakness in the U.S. Dollar. We’ve seen a portion of both throughout 2016 and Gold prices are up roughly 20% since this year’s open. Gold prices caught a major bid around the Brexit referendum, and earlier in October tested the pre-Brexit support around the $1,250-handle. But as news of the FBI re-opening their investigation made its way to markets, bringing the U.S. Dollar lower – Gold prices caught a major bid and rallied by as much as $40 last week (a move of 3.2%).
Oil (WTI, USOil)
Oil has its own themes going on at the moment of specific pertinence to supplies and longer-term direction. But the role of U.S. Government policy and their impact on Oil prices have been rather undeniable this year, and that will likely remain to a degree. Coming into 2016, the Fed had expected to hike a full four times; and this is while Oil prices were continuing to get crushed. This was dangerous for a U.S. economy that had recently amped-up energy production operations with the help of fracking and horizontal drilling. But as the Fed began to relent from their aggressive rate hike plans, the Dollar was able to weaken and this removed pressure from Oil prices.
But more recently, as the Federal Reserve has become more confident of their ability to hike rates in the near-term, Oil prices have come under pressure again; and this opens the door for a longer-term reversal formation (shown below):
Longer-term, a strong Dollar brought upon by a Clinton-win may not be very helpful for Oil prices. As we had seen in January of this year, a surging Dollar simply meant more pressure for Oil prices. And as USD strength relented in February, March and April – Oil prices were able to re-ascend. But since talk of higher-rates has been driven into markets from the Fed, Oil prices have been unable to break-higher, and this raises questions about the continued ‘recovery’ in Oil.
Should Oil prices move back to below-$30 a barrel – the world could have a very big problem to deal with.Many banks are carrying considerable exposure to energy production, and this could become a big concern down-the-road.