Don't Fall For The Bull Trap!

“Buy the dip” is now the rallying cry on Wall Street.

We wrote during short-term selloffs the past two months that the brief declines were a test to get traditional money managers and investors conditioned to buy such “dips.”

When the real plunge finally starts, which may be what we’re seeing now, these people will continue to buy all the way down, giving the HFT (high-frequency traders) plenty of profits from short selling.

In our Smarter Stock Trader and Fearless ETF Trader on February 11, we wrote:

We maintain our view that manipulation by the HFT industry is taking advantage of the mania. To trap as many as possible at the top, the game is to condition the novices to believe that every short-term setback must be bought. We are now seeing this in the aftermath of the GameStop (GME) implosion, and the cannabis plunge.

After several of these “fake-outs,” the true plunge will eventually occur, which will trap most of the speculators.

Last week, the real stock market came to the surface. We wrote: “overvalued, over-believed, overextended, and ready for a big readjustment.” 

Everything that was hot over the last 7 months was dumped.

It was unusual that during the sharp decline of the Nasdaq since February 16, tens of billions of dollars flowed into the market. Usually, money flows out during corrections. This shows that the novice investors are at the height of irrational optimism.

But what about today’s (March 9, 2021) rally? We saw a nice recovery by the hardest-hit stocks and ETFs, with many seeing nice double-digit gains.

Don’t be fooled – rallies like those we saw today are a symptom of higher volatility, not a signal of strength. The lack of substantial increases in volume is a tipoff.

The financial media today whipped the flames of enthusiasm. It is never good to follow that.

Consider the QQQ, an ETF tracking the Nasdaq 100, whose daily chart is shown below:

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In our newest Wellington Letter issue, “The Bull Trap Slams Shut!”, we examine how the credit ...

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