- The US S&P 500 index is showing a classic triangle pattern (see chart below)
- The index should see a decisive break higher or lower
- It looks like the break could be caused by (or waiting for) the US election
- Technical analysis theory does not care about Donald Trump or Hillary Clinton
- This signal could help make investors trade more cautiously
Classic Trading Signal Suggests Decisive Move at the US Election
The US S&P 500 index is showing a classic symmetrical triangle pattern on the one day chart (see chart below).
According to technical analysis theory:
- The triangle is a point of consolidation
- The S&P 500 will make a decisive breakout of the triangle, this could be higher or lower
- Because the market was rising before the triangle, it's more likely to break higher. Of course, that is not guaranteed, it could break lower. Either way, the break should be decisive
Breakout Aiming for the US Election?
The interesting thing about the chart is that it looks like it's due to breakout.
The breakout could easily be triggered by (or waiting for) the US election on 8 November.
How to Trade It?
The first thing to remember is that technical analysis is based on past performance and that does not guarantee future results.
The theory itself suggests:
- Once the market breaks out, you trade in the direction of the breakout,
- If the market breaks higher, you buy the market. If it breaks lower, you short the market,
- To protect your downside, you put a Stop Loss inside the triangle, and
- Do not put the Stop Loss on the supporting trendline because it's more likely to the hit there.
Remember that Technical Analysis Doesn't Care About Clinton or Trump
Technical analysis does not care about Clinton's emails or Trump's catalogue of problems.
The theory just suggests the market will make a significant break out of the current pattern.
Again, if the S&P 500 breaks higher, the theory says you should buy the US index. If the index breaks lower, you short the US index.
Does This Tell Investors Anything New or Useful?
It's reasonable to expect the market to quieten down before the US election.
It's also reasonable to expect a spike, or multiple spikes, both higher and lower, around 8 November. After that, the market should settle down and continue its merry way.
We also know that past performance can't predict the future and the theory is only theory, it's certainly not fact.
The real benefit might be that it makes investors think more about their trades and slow them down, i.e. the theory makes investors wait for the new pattern to be set before they trade.
It should also make investors think more about their potential losses and where they should set a Stop Loss.
If the theory holds true, investors still need to be careful, there could be significant volatility around the election. Market spikes could hit investors' Stop Loss orders and close their trades for a loss.
At the same time though, this has been a US election unlike any other. The theory may not work on this occasion.
Spread betting, CFDs and margined forex trading are leveraged products which carry a high level of risk to your capital. You can lose more than your initial deposit so you should ensure spread betting, CFDs and margined forex meet your investment objectives and, if necessary, seek independent advice.