Stock Exchange: How to Buy the Dips

Pure traders love to buy the dips – and of course sell the rips. Everyone wants to buy low and sell high. Is this part of your strategy? Do you know when and how to make that your plan? Today’s Stock Exchange will help. As a bonus, we have some interesting ideas to explore.

Review

Our last Stock Exchange discussed how to distinguish between trading skill and blind luck. The analysis included a description of important elements in model development along with some great sources. As always, the group found some interesting ideas.

Today’s Theme

Buying the dips is prominently featured on the list of trader maxims. It seems so obvious. A stock that you like hits a downdraft. A buying opportunity? Or will this dip beget another dip? Standard instructional sources (Investopedia) make only general comments.

Our regular experts include only one with a dip-buying strategy. For that reason, Holmes gets the spotlight this week, but we have some good ideas from everyone. As usual, I will conclude with a brief observation about the key points.

This Week—How to Buy the Dips

Holmes

I look for stocks that have declined, seem to have bottomed, and are starting to find legs. Once I have a winner, I must then decide when to sell. I also have position size limits, sticking with the best 16 candidates. This week provides a good illustration of my process. I really liked Nielson (NLSN), which I bought at 42.30. There might be more room to run, but I sold it at 44.54.

J: Welcome back from Mexico. Did you have any trouble at the border?

H: No. I do not fit the profile they are looking forJ

J: It is good to have you back. So why sell NLSN if you still like it?

H: My method is aggressive in taking profits. Notice how the price recovered from the bottom to the point of the initial decline.

J: Most dip buyers would not notice that. They might be looking for a full recovery.

H: A 5% move in a few days is great for a trading program. I also have limits on position size (6%) and number of positions (16). There are often candidates that I like more than my current holdings.

J: So why GE?

H: I like GE for a variety of reasons including a quick and sudden breakdown, a higher low, culminating in a turn higher. I bought this at 29.83 looking for a move back to 31. I can use a tight stop at 29 giving me a better risk reward then holding my NLSN position. Unlike humans I have no emotions about stocks I’ve bought and sold. They’re just mathematical representations of Risk/Reward analysis. Look at the chart.

 

J: Most traders could improve simply by following your discipline on position size.

H: Thanks, boss.

 

Athena

I have identified short term potential in GW Pharmaceuticals (GWPH). We may be at all-time highs here – but when has that stopped me before? Folks probably thought this stock was maxed out when it jumped up near $90 in March of last year. Now it’s trading around $130. I have no doubts about popping in here for a week or two. If it does not work, I’ll move on.

J: Once again you have an idea without any foundation. Have you ever even heard of profits? Look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

A: It is obvious that the market knows something that you do not.

J: Are you smoking something?

A: I get high through meditation. It is all that I need.

J: Well your current pick is playing in the legalized pot space. It is a hope and a dream, which could vanish in a …..

A: Enough! Spare me from your lame human pun. Many successful stocks began with a wonderful story and no earnings. You will soon see.

 

 

 

 

 

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the most recent reader questions as well as former requests where my rating has moved.

J: AMD is still on top?

F: It leads the reader list, but not my own.

J: I have had some questions about that. Readers want to know your own top picks.

F: If I talked about that here, I would be revealing what I recommend for your clients.

J: That is a problem. I want to be helpful to readers, but it should be a start for their own research. Do you have any fresh ideas of your own?

F: Yes. I have a new investment in Royal Gold (RGLD). I see real long-term potential. This stock got seriously whacked in the fall, which I believe makes it a prime candidate for an investment now. It was valued, perhaps properly, around the $85 range mere months ago. Now, with a slower 2-month recovery, it strikes me as a slow and steady way to climb back to the highs.

J: Gold has been doing well, but earnings are not the key driver. The fundamental chart shows that the earnings growth rate is less than 20, but the PE multiple is 58.3.

F: It is an attractive chart. I could frame it and put it on the wall.

J: Gold works best when there is fear of complete economic collapse or the potential for hyperinflation.

F: I have heard some of those rumors.

 

 

 

 

 

 

 

 

Oscar

I have a new sector pick. This week trading exchanges caught my eye. I’ll use the Intercontinental Exchange (ICE) as an example. This stock has been on an upswing for the last ten months. The 200-day moving average is smooth, and the 50-day moving average is rising at the same rate.

What I like most here is that the stock dipped earlier in the month. That leaves us off the peak, which I’d consider a potential buying opportunity. Outlook on this one remains short term: maybe a month, at the longest.

J: Why are you looking for a dip? You are supposed to find trending sectors.

O: It is trending. Besides, I heard that you were going to feature dip-buying this week. After the Super Bowl I need the extra money from being the featured model. That stupid dog has just been lucky.

J: Each of you must stay true to your method. Your time to be featured will come. Besides this was the happiest week in the sports year.

O: Yes!!! Pitchers and catchers report.

J: The ICE fundamental graph is very interesting – solid looking, but fairly valued.

J: Do you have a sector update for your readers?

O: Yes. Like Felix I have included the most recent requests, as well as anything that had a ratings change.

J: Can readers still learn about their favorite sectors?

O: Definitely! I will include new requests each week.

J: How will you keep busy until March Madness?

O: I understand that there is now fantasy golf.

J: You mean that you can pretend to drive 300 yards? That would be a real fantasy!

O: No. You can pick a pro and put him on your team.

J: I suspect that you will soon be looking for another way to earn overtime pay!

 

 

 

 

Conclusion

Buying the dips is seductive – so obvious. It is much more difficult than it seems.

Holmes has some lessons for us:

  1. Each trade is based upon hundreds of similar charts. This is part of his training and testing.
  2. Each trade has a limited risk, with specific exit criteria.
  3. Overall trading conditions are right before entering the trade.

This last point is crucial. Dip buying works well in a rising market, and is OK in a range-bound market. Holmes did well in the brief dip last January, but his method is not really geared for prolonged selling.

How should a trader deal with that? Like Holmes, you need an exit signal when conditions are not right. Just take a little time off, and don’t lose money in a bad market!

The Stock Exchange features the best technical ideas. We also provide contrasting opinions from fundamental investors. Each method can be profitable and both provide good lessons.

We welcome comments, suggestions, and followers for each character. Even Jeff. I try to have fun once a week in writing this, and I hope you get a chuckle or two from reading it. Here is how to join in.

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!

2 thoughts on “Stock Exchange: How to Buy the Dips”

  1. excellent article as always.
    more than likely this market is a very short term take the profit and get out. it worked well for me in 2015. in 2016 i took a longer term look at things and got slaughtered. that coupled with bad advice(paid for) a most unpleasant experience and not my first time loosing a great deal of money. i started reading your muse 2 years ago. you have been so accurate its scary. but the fact remains i simply don’t have the time to watch the mark that closely any more, i manage an industrial plant. work 7 days a week 8/9 months a year. just don’t have time to day/week/type of trading. could i quit my current job and go back frequent trading–i suppose so but i find it a strange existence–weird sleep habits to start with. sleeping after the close and waking up for the eu/asian open–hmmmm–just not my cup of tea for now. questions–is there a 1 year trade out there? i feel and have researched that most great trades last 6 months to 2/4 years and even longer. excellent example short gold looking in the rear view mirror (funny how clear that is). i think your more than likely correct–the recession i a year away–along with many snakes in the grass–the black swan is not being account for AT ALL. thank you soooo much for all the hard work you. i am grateful for your teachings. your links are amazing for the most part and i have subscribed to a couple of them. currently short USA indexes along with large cap/biotech–long vxx. i am looking at long re-metals and deep value em-markets. KEEP up the great work–thanks–sb

  2. excellent article as always.
    more than likely this market is a very short term take the profit and get out. it worked well for me in 2015. in 2016 i took a longer term look at things and got slaughtered. that coupled with bad advice (paid for) a most unpleasant experience and not my first time loosing a great deal of money. i started reading your muse 2 years ago. you have been so accurate its scary. but the fact remains i simply don’t have the time to watch the mark that closely any more, i manage an industrial plant. work 7 days a week 8/9 months a year. just don’t have time to day/week/month–type of trading. could i quit my current job and go back frequent trading–i suppose so but i find it a strange existence–weird sleep habits to start with. sleeping after the close and waking up for the eu/asian open–hmmmm–just not my cup of tea for now. questions–is there a 1 year trade out there? i feel and have researched that most great trades last 6 months to 2/4 years and even longer. excellent example short gold looking in the rear view mirror (funny how clear that is). i think your more than likely correct–the recession i a year away–along with many snakes in the grass–the black swan is not being accounted for AT ALL. thank you soooo much for all the hard work you do. i am grateful for your teachings. your links are amazing for the most part and i have subscribed to a couple of them. currently short USA indexes along with large cap/biotech–long vxx. i am looking at long re-metals and deep value em-markets. KEEP up the great work–thanks–sb

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