Sell the Republican Blowout

I see the upcoming election as a trade setup, pure and simple. Rally into the news; sell after the news.
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There is a lot of talk in the news -- bashing is more like it -- about the upcoming elections that are heavily rumored to deliver democrats a crippling blow. The markets are smart, they are anticipating this news and are already pricing in the very likelihood of that happening. That is, stocks are rallying. The thought being that Republicans are more business minded, so they will focus on legislation that is better for business. And, after all, if the environment is better for business, won't that be better for stocks?

Well, as a trader I don't get sucked into the world of politics (what's the joke? If you failed in business and acting, there's always politics). They can rant and rave and wave their hands and act important and promise change all they want to. All I ask is that they leave me alone and let me trade.

As a trader, I am not too worried about what's going to be the impact of another election on stocks a year from today. I focus on short-term trades -- a position trade for me lasts weeks, not years. I see this election as a trade setup, pure and simple. Rally into the news; sell after the news. Traders who are not aware of this will see the Republican victories next week, watch the markets gap up on the news, and decide right then and there that it's a good time to buy. I will be on the other side of that trade.

A run up into the elections makes sense, and I would not be surprised to see a gap up the day after the elections (assuming a strong win for the Republicans). That is the news. By noon that day, it will be time to sell the news.

My plan for the rest of this week and into the following week leading into the elections, is to buy in-the-money (delta of 70) call options on dips to support levels on key stocks such as (BIDU) - Get Report and (PCLN) as well as the SPDR S&P 500 ETF (SPY) - Get Report. All three are strong and currently are not showing signs of fatigue. BIDU has key resistance at $114.00. PCLN is on a tear and does not have much extension resistance until the $380.00 level. And SPY is wide open into the $120.00-$120.30 level. I am looking for the markets to back and fill into the elections, and then post-election surge potentially into these key levels. At this point, on the day after elections, I would dump my call options and then reverse and buy in-the-money (delta of 70) puts.

That is the plan. It is admittedly tough to lay out a specific strategy in trading because it's rare that the markets do exactly what you want or intend for them to do. However, having a plan means that we have put ourselves through key mental visualization techniques. We take the time to picture how we would act and react in specific situations. If the plan unfolds just like we thought -- great. We are prepared and ready to roll. If it doesn't quite work out as planned, we can adapt and adjust the strategy. This is infinitely better than the impulsive gunslingers who shoot from the hip as they react to the day's news headlines. They can certainly make money in the short term (indeed, anyone can make money trading in the short term). What we are interested in is creating a consistent source of income. And this comes from planning.

If the Democrats have an upset win, my plan is to wait and see. If the Republicans have a great night, I know exactly what I'm going to do.

At the time of publication, John Carter held a position in BIDU.

John is a Commodity Trading Advisor with Razor Trading. McGraw Hill commissioned him to write a book entitled Mastering the Trade, which was released in January 2006. Carter has also been featured on ABC Money. He and Hubert Senters founded and run the Trade the Markets web site.

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