Mish's Market Minute

Why Traders Should Be Waiting for Confirmation When Buying Dips

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For the past 10 years, dip-buying weakness has worked out very well, as the market has only been under pressure for short periods. However, the economy and world are in a new situation, one that involves geopolitical stress, rising inflation and 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 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 that, 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.


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ETF Summary

  • 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.


Forrest Crist-Ruiz

MarketGauge.com

Assistant Director of Trading Research and Education

Mish Schneider
About the author: serves as Director of Trading Education at MarketGauge.com. For nearly 20 years, MarketGauge.com has provided financial information and education to thousands of individuals, as well as to large financial institutions and publications such as Barron’s, Fidelity, ILX Systems, Thomson Reuters and Bank of America. In 2017, MarketWatch, owned by Dow Jones, named Mish one of the top 50 financial people to follow on Twitter. In 2018, Mish was the winner of the Top Stock Pick of the year for RealVision. Learn More
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