Blake’s insight:

As we are just days away from one of the most highly publicized, highly anticipated US elections we thought it would be a good idea to put pen to paper and help map out (from our point of view) what the potential outcomes are and how we could see it influencing major markets, such as the S&P 500, US Dollar and Gold.

A lot like 2016, we have a Democratic presidential candidate that is ahead in the polls. However, this candidate, former Vice President Biden, is up against President Trump. We learned back in 2016 (some the hard way) he could upend any polls we are seeing currently. There is no doubt, that President Trump has a strong base of supporters and one could argue that his influence has been far and wide. But many people in the USA have now witnessed him as President over the last 3+ years. We have seen a wave of voters, including people from his own party, turn against him. Will it be enough to put a democrat back in office? We all have our doubts, but what is for certain, is that there will be a lot of volatility coming this week and possibly the following week(s), since the race is close.

What is at stake?

Most people outside of the USA think it’s just about the Presidential race. However, there is more at stake here with a lot of seats in Congress up for grabs. From what we can tell, there is a high risk of both the House of Representatives and the Senate to be controlled by Democrats. The problem with that is two-fold. 1) A Democratic controlled Congress and a Republican President would mean any type of major bill (think stimulus package) may have a difficult time passing through both House and Senate. 2) With a Democratic President and a Democratic Congress, they would be able to pass virtually anything which could mean to the markets that not only would we get a large stimulus package, but also some sort of big infrastructure spending bill would also be passed next year. This also means that taxes could be moving higher next year as well. With all that money into the markets, you can only imagine what it may do to stocks and the US Dollar near term. We could also have a Democratic President and the Senate retains a Republican majority (as it is now). In essence, we’d have an issue where broad-based stimulus and spending bills may be limited, but tax policy may not change which should lead to an overall positive for the economy.

What will stocks do?

Obviously, as noted above, the best-case scenario we could see for a “risk friendly” environment near term, with stocks likely pushing to new all-time highs, would be a Biden win with a Democratic Senate and House of Representatives. But the market has been somewhat “pricing” this in as of late, which is why we are close to all-time highs. Therefore, the risk of a “by the rumor, sell the news” event would be possible especially considering corporate taxes may rinse quite a bit next year. However, downside should be limited as the market would look ahead into next year and all the stimulus and spending that would hit the broad economy despite the higher taxes.

Under a Trump win, it may be a little different, especially if the House AND Senate are controlled by the Democrats. Against conventional wisdom, we would believe that stocks are at risk of a move lower for a couple reasons. First, President Trump has spent his first term going after China, and with a second term, would continue to do so and go after Europe next. This will have to be priced back into the market. Second, if Trump wins with a Democratic Congress, any support to the average American to be very limited in scope, which could have a negative effect on growth, spending, inflation, etc. A spike higher after a Trump win may be met with some selling near term.

However, if Trump does win a second term and the Senate remains controlled by the Republicans,  the counter argument would be that taxes stay low which would be basically status quo. Stocks and “risk” could like this near term, immediately following the election, but President Trump going after our trade partners once again would be the big potential negative in 2021 and beyond.

But do not think a Biden win is all roses and unicorns. It’s not. If we have a Biden win, but the Senate still has a Republicans majority, any type of stimulus and help for the American consumer will be limited. However, losses may not be too bad in the long run as Biden will probably spend the next few years trying to repair relations with our trading partners.  Initially the market would probably move aggressively lower with a Biden win without compete control of congress. This is not a huge risk since a majority voters are probably “down ballot voting”, meaning some voters may vote down the ballot for ALL Republicans or Democrats, no matter for what position or seat.

What will the US Dollar do?

The US Dollar is in trouble with a Biden win and a Democratic controlled House and Senate, at least near term. The spending will be ramped up in 2021 and the risk positive environment near term may be enough to send the US Dollar back into the mid 80’s or lower on the US Dollar index (DXY) into next year. But at some point, inflation would rear its ugly head. We could see a sharp reversal or bounce if the FOMC decides to take action with higher rates, which would be likely with an sustained increase of inflation. But that is further down the road, if we ever get there.

With a Trump win with a Democratic Congress, I would expect that the US Dollar could stage a massive bounce near term as “risk aversion” takes hold. Commodity currencies would be sold, and the USD would strengthen differently towards each currency, depending how low  and rapidly the SPX moves. Overall, less spending and less stimulus means a slower economy and slower growth, and less US Dollar in circulation as well in the near term. A Trump win with a Republican Senate (like we have now) and a Democratic House of Representatives would probably illicit some near term USD selling as stocks may trade towards ATH (all-time highs) once again near term.

(Keep in mind that the US Dollar and SPX have a very strong inverse correlation, especially during extreme moves. We would anticipate this correlation holds throughout the election cycle.

What will gold do?

This is a tricky question. We have seen gold move positively with risk assets, (as the SPX rallies, the gold market and other precious metals do as well.) Therefore, in the outlined scenarios, would gold move with stocks too?

The simple answer is yes, to an extent. If stocks go higher overall, I feel that gold would move higher too. As inflation expectations start to rise, gold will rise as a result.

If stocks move lower, does gold follow? I’d say yes, but downside in gold may be limited as if the market “aggressively” sells off at some point. Gold would turn higher as a safe haven type of vehicle. Do I know where that could be? I think if you continue reading, our team may give you some better ideas!

What is the conclusion?

The conclusion is that trades should not to get too comfortable. With COVID-19 keeping voters home and mailing in ballots instead, we may not know the winner of the presidential election until a few days after November 3rd, or even longer. We could also possibly draw a conclusion that night based on what states declare a decisive winner. If it is a close win by Biden, we may expect the results to be contested for voter fraud by Trump. He has already laid the groundwork for it well ahead of time. This could put the election results “up in the air” for days or weeks following election night.

Also, we should watch some key states. There is a lot of analysis that could tell you better than I can regarding which states to watch. But a few of the key battleground states such as Florida, Pennsylvania, Wisconsin, Michigan, Texas and Arizona are some of the key ones to watch. Some combinations could make the chances of a Trump or Biden win very possible if certain states are won. Then you must factor in “how many of the votes are counted, etc.”  Florida may be one of the key states to watch. Most believe if Trump loses Florida, it will be tough for him to win. Overall, the US political environment is a big hot mess, and as traders, we will be trying to navigate through it all. The good news is that we will be broadcasting our FACE webinar as we normally do every morning to give you live updates on what is happening. SO, click this link here to register, it’s free every day.

Our community knows this when I say it, but now is more important than ever to practice. It is okay to be wrong, just don’t stay wrong. And if you get into a good trade, take some off (profits) and move stops to breakeven to protect your trade. Who knows, maybe you will get lucky and have a big move to follow and can manage a winning trade.

Make sure you continue reading to get a technical broad-based view of the SPX, USD and Gold.

Good luck and God bless America. I will see you on the FACE webinar very soon.

Blake Morrow

Elliott Wave Charts Suggests: After the storm the sun shines again

It appears that Libya’s  decisions regarding the increase of oil output was just another catalyst that sent oil prices lower last Friday. It’s just one of the issues that energy is facing; much more important is of course a spread of global lockdowns so demand is decreasing significantly in the last two weeks which causes a sell-off into wave C of the Elliott Wave pattern when looking at the price action down from September highs. Well, we see a very strong, three-leg drop for now, but “after every storm the sun shines again”, so despite a very aggressive sell-off we believe that oil is approaching an interesting area of supports. I am watching $34 as a first potential support but I realize that lockdowns may not end anytime soon so the $30.00 can prove to be an even more important level. Ideally energy will make a five wave bounce from there which is needed to call the end of the correction. I suspect oil prices will be back in recovery mode at the start of next year.

Similarly with energy we also see a sharp drop in stocks with the SP500 reversing south into a wave C as well. A good support for this market is the area around 3100-3250, so maybe we are going to see the first evidence of a bounce right after the US elections. We know that some may be looking for a 3rd wave sell-off rather than wave C, which is fine and could be a valid view, but I personally think that it’s always better to label the wave count in the direction of a trend, which is clearly up on higher time frame charts.

Last but not least, gold is another very interesting asset that will always be on any investor’s watchlist, especially during unstable periods like the one we are facing now. With QE in full force, I think metals still have plenty of room to rise. From an Elliott wave point of view I see gold in a corrective fourth wave pullback that can stop at around $1800, where the price retracement would be equal to the one we saw back in March, slightly below 100 SMA.

Trade well,

Grega Horvat

DXY || Bearish Republicans vs Bullish Democrats

Charts usually don’t lie, and given the history available since 1986, the image for Republicans has not been positive for the Dollar Index at all.

George Bush had already sunk the Dollar by more than -34%, when Democrats – by the bold hand of Clinton – tried to save the dollar from a phenomenal fall in 1992, and with an amazing and surprising + 52% recovery, putting the index trading back to 120.

In Portugal we used the expression “be a short-lived sun” – when something good disappears fast. When the Republicans take command of the troops, by the hand of George W. Bush, the market lands at new historic lows, in a graphical representation of -40% (similar to the drop already provided by his father before W.J.Clinton), only recovering again, by the Democrats of Barack Obama (+42%).

Now the technical part:

What DXY has formed during Trump’s first term is a technical double top, which can put the price trading around 76.14, after validation below 89.03.

DXY is bouncing from an ascending trend line support, and at this point, it can also be seen as a support for one right shoulder. The inverted head and shoulders pattern will only validate above the previous highs (102.210), invalidating the double top, and it should target the 200% fib extension, projected at 115.350.

In an objective and superficial opinion, we could say that a victory for the Republicans will imply more bearish momentum for the Dxy given the history of the past 30 years, and on the other hand, a victory for the Democrats may give access to more bullish and upside momentum.

Andre Cardoso