The Wedge That Stopped The S&P500

news s&p500 Sep 05, 2020

Published by Anthony Di Pizio

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An Intriguing Setup

We're not advocates for technical analysis as an investment strategy. In fact, we consistently caution people against making decisions based purely on charts.

However, every now and then a setup hits our screens that forces us to really pay attention. 

Interestingly, in August-September of 2016 the S&P500 began rolling over as election uncertainty weighed, and declined steadily until Trump's victory. We all remember what happened after that, but here's a refresher:

This upper trend line has kept price capped for 4 years. Now, it's an expanding wedge, the lower bound of which began to form in January of 2018. It (sort of) marked the bottom of the COVID-19 pandemic selloff back in March, which is yet another reason the whole setup is worth monitoring.

Price has been practically vertical since coming off the lower bound, now running straight into the upper level triggering a messy 2 day selloff. 

Like most people, we're bullish on equities and therefore we don't anticipate another visit to the bottom end of this wedge. We expect choppy price action until the November election, in an S&P500 range between 3,000 and 3,500. The turning point or buy zone should fall somewhere in the highlighted area:

Whichever way it plays out, we think a test of 3,000 is likely as people start to adjust portfolios based on potential policy changes as a result of the presidential election. 

COVID And The Election

US Presidential elections bring uncertainty but this one is very different to most. It's possible we're going to see some material COVID-19 vaccine or therapy news at the end of October, early November, which will overlap directly with election day. A vaccine would logically be the biggest market catalyst as it would unlock the economic potential the world has lost.

If we look 12 months out, we think the market will be in roughly the same place irrespective of the election winner, however the pace at which we accelerate higher will be dependent on the next President. 

Trump's personality and craziness aside, his second term would likely breed better market performance compared to Biden (taking a 4 year outlook), simply because a Biden administration would:

  • Seek to raise current corporate (and individual) tax rates
  • Introduce new tax policies including a Wall Street transaction tax
  • Explore large government programs like medicare for all and new environmental policies (we're not saying these are bad things)
  • Mean a regulatory regime closer to Obama's (ultimately, more regs)

We're not trying to make a prediction here, we just wanted to add some context to our technical case. History does tend to repeat, after all. 

Did you see our latest article on the US dollar? You probably should check it out... The US Dollar Has Bottomed

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