Daily Commentary: October 21, 2020

Jeremy Engelbrecht1Option Commentary

A Pre-Election Stimulus Bill Is All That Is Keeping the Market Afloat

Posted by Pete Stolcers on October 21

Yesterday the market tried to recover some of the losses from Tuesday, but it finished near its low of the day. Investors are monitoring every word from Nancy Pelosi and Steve Mnuchin. The stimulus bill negotiations continue and “progress is being made”. The negotiation could be lip service and an agreement needs to be reached by Friday if it is going to be approved before the election. Earnings season will kick into high gear next week and that will keep buyers engaged.

Regardless of which party wins, a stimulus bill will be the first matter of order and investors won’t have to wait more than a few weeks. Based on my technical observations, the potential for an agreement before the election is all that’s keeping the market afloat right now. The Coronavirus is spreading domestically and major metropolitan areas are shutting down. Most of Europe is in a lockdown. This viral resurgence is going to greatly reduce economic activity.

The election is only two weeks away and I fear that a victor might not be known for weeks. If you think that the stimulus bill negotiations are a mess, imagine the political chaos that would ensue while we wait for an election outcome (not to mention the domestic unrest). Mail in voting is going to complicate the process. The market hates uncertainty and I sense that Asset Managers are reducing risk now.

Economic growth has been stable, but that is likely to change given the spread of the virus. If the country goes into another shutdown, $2 trillion of stimulus may not be enough to prevent credit issues. Debt across the spectrum (personal, state and local, corporate) is at record levels and balance sheets are incredibly weak.

There is good news. Once the election results are known and once the stimulus bill is approved, the market will stabilize. AstraZeneca believes that it will begin mass distribution of its vaccine before Christmas. We need to get through the next two months.

Swing traders should remain sidelined. Yesterday we closed all our bullish put spreads for a breakeven (or a slight profit in some cases). We only have one open position. Tonight I will be releasing my Weekly Swing Trading Video and I have a couple of positions in mind that should benefit from volatility. We are going to keep our bets small and wait for clarity. I did not like the market drop Monday and the price action tells me that if a stimulus agreement is not reach we will see heavy selling. I don’t have any faith in Congress so I don’t want to risk capital on the premise that they will do the right thing.

Day traders should expect excellent intraday price action. Buyers and sellers are paired off and the daily ranges will be wide. When the momentum in one direction stalls, look for a reversal. The 1OP indicator will help us identify those swings. Earnings season will also provide us with excellent opportunities and the After Earnings (bullish and bearish) searches should be monitored right on the opening bell. I’m still finding the price action on the upside to be more consistent and easier to trade. On the short side, the decline much choppier. Stocks make a big drop instantly and then they spend 20 to 30 minutes retracing. This requires a great deal of patience and I suggest taking profits on those big drops.

While politicians muddle around I expect to see a slightly negative bias and the 50-day moving average could be tested this week. Support is at SPY $340 and resistance is at $347.

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