After the Election, This Reversal Trade Is Picking Up Steam

By Larry Benedict, editor, Trading With Larry Benedict

The aftermath of the U.S. election featured plenty of big market moves.

Stocks surged with the S&P 500 gaining 2.5% on the day. Small-caps fared even better with the Russell 2000 up 5.8%.

Bond yields jumped with the 10-year Treasury rate hitting the highest level since July.

The U.S. dollar joined the party as well, rising against other currencies.

Such an emotional investor response is fertile ground for spotting trading opportunities.

Because many times, we can see a retreat from the initial reaction.

Here’s what to look for – and one market that could be setting up a big reversal…

Big Moves From Failed Moves

There’s a saying in the market that “from failed moves come fast moves.”

A stock may appear to be breaking out (or down) from a key level.

But then the break fails – and the price moves quickly in the opposite direction.

Let me show you an example. Take a look at the chart below of the S&P 500 from early 2016:

(Click here to expand image)

The market was in freefall to start that year. The S&P fell to the 1,850 level at “1” in January.

That became a new area of price support to watch for the index. The S&P 500 rallied off that level into early February before reversing back lower.

But look at what happens at “2.” The S&P 500 tested the 1,850 support level (shown with the dashed trendline) several times.

And during one trading session, you can see that price closed below that level.

When important support gives way, that signals that the downtrend will continue.

But it doesn’t always work out that way. In this case, the breach of key support fooled everyone.

The S&P retook the 1,850 level the very next day and went on a massive rally.

And we should keep these types of sudden moves in mind right now.

The knee-jerk reactions to the election are behind us. So I’m looking at markets that could be setting up a big reversal.

Here’s one I’ve got my eye on…

Bonds’ Failed Breakdown

After Donald Trump won the presidential election, a big move unfolded with longer-term interest rates.

Trump’s campaign promises are stoking inflation concerns, which sent bond yields higher.

But that initial reaction might be paving the way for a failed breakdown. Take a look at the iShares 20+ Year Treasury Bond ETF (TLT) chart below:

(Click here to expand image)

Recall that bond prices move inversely to interest rates. So when rates are rising, that pushes bond prices lower.

Heading into the election, rising long-term rates pushed TLT down toward the $90 level (the horizontal dashed line).

TLT has tested that level several times over the past six months.

On the day after the election, TLT dropped below the support level (see the arrow). But then TLT immediately reversed course and has been rallying since.

There is also positive momentum with the Relative Strength Index (RSI) in the bottom panel.

As TLT was chopping around support, the RSI was making higher lows (see the dashed trendline).

All this suggests that TLT could be in the early stages of a big reversal higher.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict