*
skip to Main Content

Sign up for our Free Daily Digest newsletter: Actionable insight every morning, designed for the self-directed investor. Find out more

The US S&P 500 index is showing a classic symmetrical triangle pattern on the one day chart, Adam begins.

According to technical analysis theory (see chart below):

  • 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.

The Triangle Pattern on the 1 Day Chart:

Chart no longer available

 

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
  • Do not put the Stop Loss on the supporting trendline because it’s more likely to 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.

The Triangle Pattern on the 4 Hour Chart: 

Chart no longer available

 

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. Investors should be aware that the theory may not work on this occasion.

 

About Adam Jepsen

We interviewed Adam Jepsen in September 2016 to find out more about his motivations for setting up his brokerage, Financial Spreads. You can read the interview or find out more about the Financial Spreads brokerage here.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Michael Morton

Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

Stocks in Focus

These international smaller companies offer exciting potential returns for investors willing to take on an element of risk. Read our in-depth reports to find out why we like them

Comments

Back To Top