Markets Crash: How To Trade After The US Elections

Apurva Sheth

Yesterday in a nationwide address, Prime Minister Modi, in a move that is being seen as a full frontal attack on the hoarding of black money, announced that currency notes of Rs 500 and Rs 1,000 denominations will be illegal starting 12 midnight on November 9.

This announcement has met with shock and confusion. The Aam Aadmi is struggling to make sense of how it will impact his transactions right from small purchases in mom and pop retail stores to big ticket purchases like jewelry and real estate.

But for the Aam Investor and Trader, it's been a double whammy!

Just when market participants were biting their fingernails waiting for the outcome of the US Presidential Elections, PM Modi dropped this bombshell and added to the uncertainty.

As we already know, markets hate uncertainty and love status quo and as of now it seems like they are not getting either of them.

Obviously then the markets have reacted negatively. Nifty opened with a gap down of 475 points close to the 8,000 mark. India VIX has gone through the roof.

At this time of confusion and chaos, one question reigns supreme in the Trader's mind: How should one trade in these volatile times?

So today I want to remind you that successful trading is about three M's - Mind, Method and Money.

Mind is your trading psychology. Method is how you go about finding trades and making entry and exit decisions. Money is how you manage your trading capital for long-term survival and success.

At Swing Trader, we have been using all three M's right from the start. Today, I will focus on the Method aspect of the three M's and show you how it can help us in finding an anchor in the current storm.

We use technical analysis to study the markets. It helps us identify which side is stronger - bulls or bears. We use price patterns, volumes, trendlines, and momentum indicators to recognise uptrends or downtrends, and then generate buy or sell signals.

Markets were trending higher after forming a double bottom in February 2016. Nifty began its upward move which lasted until September as the Nifty topped out at 8,970 levels. Over the last two months it has been grinding lower.

Last week it closed below the 8,500 mark for the first time since July 2016. This resulted in the confirmation of a head and shoulder top, which is a classical bearish reversal pattern. The formation of this pattern after a rally suggested that bulls are likely to take a backseat and bears are going to remain in the forefront and drive the index lower.

I was observing this pattern for more than a month and decided to stay light in our trades since October.

Measuring implications from this pattern suggested a drop of approximately 470 points from the neckline of 8,500. Still, I never expected a vertical fall like we have seen today.

Daily chart of Nifty from February 2016

In my weekly video update (requires subscription) on November 5, I showed the above chart and mentioned that there will be a lot of ups and downs in between which will give us opportunities to trade.

We had braced ourselves up for a couple of stocks and were waiting for any knee-jerk reaction to get into it. This morning we got just that! We now have the opportunity to enter the stocks we were waiting for a long time at lower levels. In fact we went live with two of our trades this morning.

What kind of setups to look for?

Markets were down more than three percent today and may remain under pressure for the next few days. However, there will be lot of trading opportunities especially on the long side. Whenever markets drop down sharply it is normally followed by a sharp pullback. It's like throwing a rubber ball straight down from the top floor of the building - the sharper the fall sharper the pullback.

Pullback after a sharp Fall

Markets never move in a straight line. They always move back and forth and we need to use the right tools to trade the markets. With a solid process and approach you can find such stocks which are ready for a pullback. For example, moving averages can help identify price extremes and find those stocks which have deviated sharply from the mean and could reverse back to it.

One should always be careful while trading such pullbacks. Always trade with proper stoploss as trading is primarily about probability and never about certainty. One should also employ proper money management rules and risk only a small portion of your trading capital on each trade.

At Swing Trader, we will be looking for a lot of great trading opportunities in the next few days, and will be using all the three M's while making recommendations.

How are you trading after the US Presidential Election? What strategies will you use to identify trading opportunities? Share your views in the Club or share your comments here.

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3 Responses to "Markets Crash: How To Trade After The US Elections"
Rajesh Dalal
11 Nov, 2016
I would like to know which are the right stocks to buy after the US Election Like 
KD
11 Nov, 2016
Huge amount of purchasing power (probably hundreds of billions of dollars) is wiped out because new currency is not yet come into circulation. Demand will be reduced dramatically and it is showing up in equity markets. Like 
Sebastian
10 Nov, 2016
Financial policies of the new administration are going to determine whether rthe markets rise or not; e.g. the Federal Reserve rates.Like 
We request your view! Post a comment on "Markets Crash: How To Trade After The US Elections". Click here!