Good Day Rookie Bloggers! If you have been watching the markets over the last few days, you may have noticed a slight change in the markets. The major indexes have been steadily climbing to new highs for a while now and yet the last couple of days have slowed this accent and some have even turned over completely like the Dow. This is not to say that the sky is falling but that maybe we are now seeing a similar move to what we have witnessed each month for the last three or four months. Of course, this could also be something more but do we really know? This is something we will explore in this week’s blog.
Take a look at the chart below, it is a chart of the SP500 futures. We can see that in May, June, July, and August this chart each experienced a pullback before turning around and chasing another new high. The “buy the dip” has been quite active and quite regular. We are now into September and we are seeing another pullback but the question that arises for all of us is where does this pullback end? Or more importantly, do we jump in and “buy the dip” or do we wait and sit?
If we look at this chart we can see that each time the index pulled back it to around the 50 period moving average so if that happens now do we jump right in and buy the index? Let me pose this question to you and see if it can explain what this situation requires. Let’s say you are in the Amazon rainforest and you want to go so swimming and there is a pond in front of you. Now you believe that it is safe to go in that pond because you haven’t seen any danger such as crocodiles or piranhas. Just because you haven’t seen any dangers does that mean there aren’t any? The answer to that is no! Now, let’s say you throw a rock into the pond and nothing happens, is now the time to jump in? Again the answer is no! Finally, your friend decides to dip his toe in the water and nothing happens, how about now? Are you good? At this point, you are feeling more comfortable about going for a swim and it makes sense that you would get more confident. The key to confidence in this scenario or trading is usually not to be the first one to jump in the pond.
There are things that should be seen before jumping into a pond and especially when “buying into a dip.” Each of these things can make our confidence in “buying the dip” a little stronger. First up is the technical factors that we can see. We talked about the 50 period moving average. The blue line on the chart has acted important in the recent past so is it possible that it could be important again in the future? I would say that is a likely proposition.
We can also draw a falling trendline from the peak on down and catch as many tops of the candles as possible to form a trendline. A minimum of two or three points of contact is necessary to form a retracement and subsequently a trendline. A push back above this in conjunction with the bounce off the 50MA starts to give more confidence that the buy the dippers have come back to play.
Lastly, we don’t want to be the first to jump into the pond and we don’t want to be the first to “buy the dip” either and for that we can go into intraday charts to see if the buyers are starting to step up. We can see these intraday resistance levels getting broken and this can add to the confidence even more. If we are trading on the daily charts then we can go into either the hourly charts or even the bi-hourly charts to see these levels getting broken. This works because all price charts bleed into one another which means before the short-term trend changes on the shorter time frame chart before it can turn on the lolonger-termharts.
These three things can help us determine whether we should “buy the dip” or wait and sit. Of course, there is no exact perfect time to get into a “buy the dip” trade but when we have our confidence in our read it makes it much less stressful and should improve our timing. It is also important to note that just because the short-term trend reverses that doesn’t mean it will continue in that direction but at least we are setting ourselves up in the best position to begin the trade.
I have always been in favor of letting others clear the path and in trading and swimming in the Amazon, I think this is a good way to stay safe.
Trade Well,
Coach “Old Money” Holmes
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
