Why Traders Should Be Waiting For Confirmation When Buying Dips
Michele Schneider | Apr 28, 2022 12:19AM ET
For the past 10 years, dip-buying weakness, as the market has only been under pressure for short periods, has worked out very well.
However, the economy and world are in a new situation that involves geopolitical stress, rising inflation, along with the continued recovery from the pandemic.
With that said, dip-buying weakness could get much tougher if the market gets stuck within ranges, or trends lower for a long period.
Therefore, if traders are going to look for reversal plays, they should at least stick to an easy-to-use reversal setup.
Searching for a short-term bottom is no easy task and can be very costly if the position is held and the dip keeps dipping. In that case, we’d be buying a falling knife.
One simple way that increases your chances of a reversal trade is by waiting for a second day to confirm a reversal move. While this can be done on any timeframe, we will be using a daily chart.
Using the S&P 500 (SPY) as an example, we can look at its recent move to support near $414 as a potential dip-buying opportunity. Next, we can watch for the SPY to clear its Wednesday high over $422.92.
If on Thursday, the SPY clears and holds this level, we would have an entry based on a reversal with our risk underneath a key support level that also has technical support on the chart.
Of course, the downside to waiting is getting in a trade at a higher price. However, the extra money paid is well worth it since it increases the chance the trade will work out.
Whether the trade works is for the stock market to decide, however, at least we know we used a sound method for entering a trade with sound risk parameters.
It is good to remember that sometimes you will take great-looking trades that don’t end up working out.
One last thing to note is when looking at the SPY from our Real Motion Momentum indicator at the bottom of the chart, we can see that momentum (red dotted line) could potentially bounce off the lower band showing momentum is holding a key level.
- S&P 500 (SPY) 414 to hold. 410 support.
- Russell 2000 (IWM) 187 Pivotal.
- Dow (DIA) 326 next support area.
- NASDAQ (QQQ) 317 pivotal.
- KRE (Regional Banks) 63.80 now minor resistance level.
- SMH (Semiconductors) 237 new resistance. Needs to find support.
- IYT (Transportation) 239 support.
- IBB (Biotechnology) 118 support.
- XRT (Retail) More support at 70.
- GLD (Gold) Needs to get back over 176.
- USO (Oil) Holding over the 50-DMA at 74.26.
- DBA (Agriculture) Holding upward trend could test the 50-DMA at 21.90.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.