Trend is your Friend Amid Post-Election Uncertainty
With bonds tanking and stocks showing some uncertainty at the top, speculation about future US policy changes is growing, as is global uncertainty. At such times, the trend is your friend. The trend—and limited risk.
By Vikram Rangala
Monday, November 14, 2016 - 00:00
Investors and traders of stocks, commodities, and forex have a number of recent developments to consider—or ignore—as they decide what to buy and sell. The post-election rally may continue for some time, especially if bonds continue to fall. However, a number of uncertainties make the situation more complex.
US stocks fell slightly after a 3.8% rally last week. The Russell 2000 bucked the trend, rising to a record high. Money flowed out of bonds and into equities overall last week, with sectors expected to do well under the next administration, such as banks, mining, and energy, seeing a surge of buying. Sectors which may see trouble, on the other hand, sold off.
In the US, tech stocks led Monday morning's decline. Many analysts point to uncertainty about future trade and immigration policy. Tech firms like Apple, Google, and Microsoft rely heavily on Asian manufacturing and engineers who came to the US on H-1B visas.
Overseas markets rallied with US stocks last week, but some are reversing. Denmark, for example, had been a safe haven for investors fleeing uncertainty in the EU. When the debt crisis in Greece and other countries hit, Denmark drew increased investment, largely because its stock market is heavily weighted toward global trade and therefore less affected by European developments. When the Swiss franc was unpegged and again after Brexit, money flowed into Danish stocks and the Danish kroner, which remained strong versus the euro. After the US election, Danish stocks have dropped sharply, with the Copenhagen 20 down over 10%.
The MSCI Emerging Markets index also took a sharp hit. Meanwhile, Chinese investors who had been on something of a spending spree in the US have put a number of M&A deals on hold since the election.
In such an environment, where the news itself doesn't know what's next, many traders fall back on the old truism, "the trend is your friend." For short-term traders in particular, this can be a useful strategy, since markets which may not show a definite long-term trend can still make solid moves in the intraday and daily timeframe.
For example, the German DAX stock index (Germany 30 on Nadex) has shown some hesitancy near the highs of last week's rally.
However, the intraday 5-minute chart showed a wedge-formation and a well-defined, downward trend.
How do we know it's a trend? In this case, we're sticking with the basics. A downward trend is defined simply as "lower highs and lower lows." The break below the wedge suggests that this market may head downwards. No guarantees, of course.
Some traders will see this as a straightforward sell. Others will look for a bounce and buy the countertrend move. Both strategies can work and we're not here to recommend any strategy. But both strategies can be used with greater confidence if you can limit your possible loss to a predefined amount.
That's the advantage of trading binary options in combination with a short-term trend-following strategy. You don't need the market to make a long, sustained move in order to profit. The all-or-nothing returns of binary options mean that even a small move to the profitable side of the strike price line is enough to get a substantial return.
At the same time, you know that you won't lose more than what you paid up front, but you also won't get stopped out, no matter how far the market goes against you. This means that if there are fluctuations along the way or the trend takes a while to develop, you have staying power to remain in the trade.
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