Buying The Dip Right Now Might Not Be The Best Trading Strategy

Equities markets are clearly in a bullish trend; both intermediate and long-term markers are pointing in the same direction. Stocks continue to make higher highs and higher lows (our textbook definition of an uptrend), while supporting indicators like the MACD, relative strength, on-balance volume, and money flows continue to show bullish power.

Markets are also in overbought territory, a condition that doesn’t mean sell! It just means that few traders are ready to sell their shares.

The combination of the two – bullish trend, overbought condition – means traders are eager to “buy the dip”. (When a stock price pulls back temporarily (because traders are taking profits), scoop it up before it shoots higher – again.)

This bullish market has given us a few shallow pullbacks that are short-lived. The dip buyers have showed up every time, but not for this latest pullback. Instead, they are hesitating.

Buying the dip right now might not be the best strategy

Friday’s pullback is not typical of a bullish pullback. We had a high concentration of down issues in key sectors. Plus, bullish indicators rolled over. These are signs to proceed with caution.

In other words, it might be best to pass on buying this dip right now.

I’m not saying a bearish trend will develop, though it could. The pullback was massive. Traders were hitting the sell button all day long as volatility ratcheted up. The poor Nasdaq got hammered with a 4% drop. We have not seen action to the downside like that in quite some time.

Technicians (like me) know stocks and indices need to test support at the 50 day moving average before the markets can reset. Hitting that support level may not happen today or even this week.

But remember: The long-term trend remains up, and even a pullback to the 50 day moving average will not disturb the trend.

In the short-term, we have a headwinds. We are in a seasonally bearish timeframe, the Fed has an upcoming meeting (which will be led by the new Fed Chair), and the Iran War continues.

While this huge pullback may scream, “Buy the dip!”, I’m waiting to see what happens with the low established on Friday. If bullish conditions re-appear as dip buyers show up, then it’s time to buy the dip.