Daily Commentary: October 27, 2020

Jeremy Engelbrecht1Option Commentary

Expect Market Weakness Ahead of the Election – Do This If We Get A Big Drop

Posted by Pete Stolcers on October 27

Investors have pre-election jitters and the SPY closed below the 50-day moving average yesterday. A stimulus bill in the next week is unlikely so that safety net is gone. Mail-in ballots could delay the election outcome and civil unrest is possible if the process drags on. I believe the 100-day moving average could be tested before November 3rd.

The Coronavirus is spreading in the US and in Europe. Major metropolitan areas are in Phase 3 and this will hamper Q4 economic growth. Mega cap tech stocks will report this week and we will hear from Microsoft after the close. At a P/E of 23, stocks are rich. Tech giants have come under fire and antitrust legislation is being considered.

Economic data points have been good, but they are likely to soften due to the recent increase in Coronavirus cases.

The market has a tendency to decline into elections and it has a history of rebounding 6% on average after the results are known. The exception was in the year 2000 (Bush/Gore) when it took weeks to determine the winner.

If the market pulls back to the 100-day MA I will buy. Coronavirus treatment has improved dramatically and the mortality rate is declining. Vaccines could be available as soon as Christmas (AstraZeneca) and the distribution channels are in place. Both parties want a stimulus bill and it will be the first matter of order for the victor. Interest rates will remain near 0% for the next two years and that will push investors into equities.

Swing traders should place an order to buy a half position of SPY at $330. If the election results are not known for weeks and the market continues to decline we will add the other half. If we get a big market drop we will take advantage of the opportunity. If not, we will stay in cash and wait for clarity.

Day traders should go with the flow. There are opportunities on both sides of the market. Use the 1OP indicator to help you time your entries and exits and to help you determine which side of the market to be on. Option Stalker searches will help you find relative strength and relative weakness. I like stocks that are breaking out/breaking down and that have heavy volume. Earnings season will kick into high gear and we will have post earnings opportunities as well. I am reducing my trade size and my trade count until the election. The price action will be choppy and I believe the bias will favor the downside.

My market comments will not change much before the election.

Support is at SPY $335.60 and $330. Resistance is at $340 and $346.

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