Today, I want to review some of my long trades and talk about the approach behind buying the dip and why it is finally starting to work well. I am talking about some important tips to help you successfully buy into this market, and we are not talking about buying a pocket knife or keeping it in your purse.[1]
Market Recap
Let’s dive into the market overview. So, if we look at the spy market, we’re finally starting to get out of the lows. If you think about it, long dip strategies will naturally only work once the overall market and the S&P 500 start to recover.
Tip#1: Always check the market sentiment
On really long red days, there is no point in trying to buy the principle or go long any of the stocks. Let’s say the market has been in good balance for the last two days, and we are recovering from the slump in the House vote at the Fed meetings.
Tip#2: Large Cap Stocks
However, we can see decent rallies. When I see that we regularly go from one to four days, I look at many of what I call market stocks, which are large stocks that follow the market closely. They have to be large caps and can’t be small caps.
Their lending strategies are a little more complicated with small caps, so we’ll discuss that in another blog. When you’re trying to purchase the dip, you want to pick large stocks that have shown, at least on the daily chart, that they can recover. So, if you take as an example a stock that will be one of the first stocks I borrowed today, it was at about $166.
Example 1
I was trying to hold onto the possibility of getting to $169, $170 or higher. It ended up holding about two points from $166 to $168. In this case, I’m taking it up to about $166. Now, if you take the line on the daily chart, there are the $155, $160, and $166 areas. It’s gone from $160 to $190 in the past, so we’re talking about the possibility of a 30-point bounce, at least on the daily chart.
I don’t think we usually get that in a day, but we day traders try to hold onto a dollar, two dollars, and sometimes three, four, or even more when the actual market comes out. Stock selection is a significant factor; look for big savings that can be rebuilt, and don’t waste a small amount. Of course, the market sentiment you want to pay attention to is waiting and buying on the dip when the market bounces.
Example 2
The second example is very timely. The two examples are from different categories. One is Chinese stocks, the other is US stocks, but they have the same internal chart structure. The two prices diverged overnight; for example, 1 bounced from the previous day’s close of $177 to $174 in the early market and sold for $166. I watched the long post. It held at about 10 pips or 8 pips down before it bounced.
Example 2: it’s the same story because they also split. It was a decent split, and then it was sold on the street. Both reacted to the market the same way. While they may seem the same at first glance, the difference is in the timing. Example 1, let’s say I started around 10:00, and this item went from $166 to $169 and then went back to $167 around 10:30 or 10:40. Then there was a significant recovery from 10:30 to 11:00 from $167 to $170.
Tip#3: 10:30 to 11 is the perfect period to buy the dip
This is not the same as a bargain buy; in this example, buying a downside breakout is a losing strategy. Just don’t do it. I know it drove well in 2021 and 2020, but if you purchase this market in 2022, eight times out of ten, you’ll hit carpet resistance.[2]
Example 3
As for the other large-cap stocks, I have very few of them, and these entries are much earlier. One started at $120, and I chipped away a bit, but eventually, I added a v1 bounce for around $120. When I covered all my shorts, it was around 10:30-10:40.
I wrote everything there because I knew it was about to recover, so the idea was the same even though it didn’t take long. If you’re short, you should cover when you know buyers are coming in because that will help protect your profits.
Example 4
Even though they are in different industries, these are all great stocks, so I just narrowed it down to the stock. However, the balance only started dropping around 10:30-10:40; was that a coincidence? I think not! One of my favourite short strategies is when a stock shows low volume after a few days of action. Often, in the pre-market, you will see a lot of rejections for items under $40. I was late to this and spent about $39 in the seventies. The product was also removed and closed a few days ago. I covered some down to $38 in the nineties and all the $38 in the twenties. The only thing I could have improved on in this short was that I had to wait until 10:30. I wanted to improve my profit margin with this brief.
Even though they are in different industries, these are all great stocks, so I just narrowed it down to the stock. However, the balance started dropping only around 10:30-10:40; was this a coincidence? I think not! One of my favourite strategies for shorting is when the stock also shows low volume after a few days of movement. In the pre-market stage, you will often see many rejections for under $40. I was late with this and spent about $39 in the seventies. The product was also removed and closed a few days ago. I covered up to $38 in the nineties and all the $38 in the twenties. The only thing I could have improved on this short is that I had to wait until 10:30. I wanted to improve my profit margin with this brief.[3]
Understanding whether you’re buying on a dip or a breakout and a short position is helpful because you want to balance both minds. Remember, as a short vender, you want to cover your shorts when buyers come in, and if you’re a buyer, you want to buy the stock when the shorts are covered.
Recap
Let’s look at these three golden tips for buying a dip strategy that works well in the current market.
First, you need to know the market sentiment. The market needs to start to recover, so if you look at the S&P 500 or QQQ, it should show the bottom of the daily chart, not a jackknife. If that happens, don’t wait.
The second tip is stock selection: stop trading junk stocks because they can go up, but they can also go down. Whether they go up or down is anyone’s guess. Large-cap stocks can historically show you whether they have a good chance of recovering from their lows.
Number three is the golden hour of 10:30 to 11 a.m.; this 30-minute period, give or take, is usually the best time to go long and balance stocks. Although we are in a bear market, there is money to be made on both long and short positions.