Weekly Update: Where to “Buy the Dip”
Good evening, and welcome to this week’s edition of Stealth Trades!
It was a bloody week on Wall Street.
On the heels of a nasty selloff last Friday, stocks continued to push lower all week. In 6 of the last 7 trading days, the S&P 500 index broke the low of the prior session.
Declines like this or normal. In fact, they are part of the process.
Stocks don’t go straight up. After strong bursts higher, there tend to be short-term declines while the market is digesting the move and weak-handed investors take profits.
This creates the stair step pattern we often see on stock charts. It is also the reason so many investors love to “buy the dip.”
Dip buying is easier said than done. While it may look easy in hindsight, buying in the midst of a vicious decline is anything but easy.
So, instead of trusting my gut when emotions are high (never a good idea), I like to map out buy levels in advance. These are pre-determined price zones where I am committed to adding to my account if and when that price is hit.
But where do you buy?
Right now, we are in a clear and undisputed bull market. The average bull market “dip” is usually 8-12%. But I want to find some sort of technical level that could serve as support to back up my buy.
Here’s what I’m looking at now…
In the daily chart above, I have drawn a box around my Buy Zone for the S&P 500 index. My goal is to add on in the 5600 – 5750 range if given the opportunity.
This level is significant for a few reasons. First, it coincides with the 200-day moving average (white line on chart) where stocks tend to defend their uptrend.
There are also several previous support and resistance levels in this region which I have drawn as dashed lines.
Look at the middle of the three lines. See how there was resistance in July and August, preventing the market from going higher? Once we broke through, it then served as support in September, October and November.
This is telling us that the area is significant. It is a magnet for buyers and sellers and, if reached again, will likely see buyers stepping in once more.
Buying the dip is more of an art than a science. Don’t try to nail it to the penny. But the simple exercise of establishing where you will buy… in advance… before the market gets there will make it much easier to pull the trigger when the time comes.
Best wishes for your trading,
