Dow Jones Support and Resistance, Post Election Scenarios
By: The Moral Economist
Tags: Economics, Business, Investing, Finance, Politics

(November 1st, 2020 10:30PM) Our first chart goes back to 2012. From 2012 to 2016, there’s a support/resistance channel that, extended to today, would give a fair value range for the Dow Jones of 21250 to 27250. For reference, the Dow currently sits at 26445.

There’s nothing objective about this range that really makes it a “fair value”, other than it was a strong range for 4–6 years and much of 2018–2019 was spent overvalued relative to it.

Reasons for bearishness include election uncertainty, potential tax hikes from a Biden administration, a resurgence of Covid cases, a potential lockdown, and uncertainty regarding recovery trajectory.

Reasons for bullishness include the Fed’s multi-trillion dollar stimulus, a potential V-shaped recovery, post election certainty, another round of stimulus, and the fact that the market is currently within its 2012–2016 fair value range.

The market broke out of two year resistance with the election of President Trump in late 2016. Things went exponential during 2018, breaking out of the 2012 to 2017 fair value range.

Since then, we have been more or less range bound inside a giant megaphone from 2018 peak to 2019 trough, except for the what I consider to be a brief “fake-out” from December 2019 to February 2020 prior to the recent market crash.

The lower bound of the megaphone suggests that we could retest 2020 lows of 18k. However, that would be lower than the fair value range, so it is unlikely that the megaphone pattern continues unless some extreme bearishness enters the market.

If the megaphone does continue, bearishness will likely be short lived based on how quickly the market has rebounded from December 2018 and March 2020 (~less than 2 weeks).

Zooming in a bit, there is strong support from 24500 to 25800. However, there is a big gap below 24500 with support not kicking in until the mid 22k’s. On the bearish side, the V shaped recovery has started slowing significantly, with a recent double top forming in the market from September and October highs.

My best guess is that the bearishness in the market has not yet left, until there is more certainty regarding the election and Covid cases. According to 538, there is an 90% chance that Biden is elected; however, PredictIt betting odds place Trump’s reelection chances at nearly 40%.

A Biden presidency might mean lower stock valuations from less buybacks and a higher corporate tax rate, yet higher expected stimulus from a Democratic congress/presidency might counter those. Nevertheless, in the short term, there could be another correction and retesting of 2020 lows based on accelerating Covid cases and a lame duck congressional session where further stimulus is unlikely.

A Trump reelection could bring confidence back into the markets, yet his lackluster Covid response could mean the recession will last longer than had things been taken care of better earlier, i.e. federal mask mandate, tougher lockdowns, etc.

Disclaimer: This article is not intended as investment advice.

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