More often than not, we find ourselves concentrating on the micro rather than the macro, thus keeping the ‘big picture’ in mind is prudent. While theS&P is in a bull market up-trend on the daily timeframe, there are periods of overbought and oversold levels making ‘higher highs’ and ‘higher lows’. Assuming the uptrend continues, ‘buying dips’ would consist of looking for oversold conditions to enter. But how do we anticipate a dip? How do we know a market is overbought or oversold?
The chart below shows the percentage of stocks in the S&P that are above their 50-day moving average. As you can see, 80% of stocks are above their 50-day moving average, showing an overbought condition. Although shorting an uptrend is not very safe, you may consider selling vertical credit spreads to capture option decay and limit your risk.
As a technical trader, price action speaks for itself. The charts tell us everything we need to know, yet we cannot simply ignore fundamental shifts in the market. For example, many fund managers are still on vacation and shouldn’t return until after the upcoming 3-day weekend. Not to mention we have an unemployment report due this Friday, which would lead to considerably less volume. Low volume allows the market to skew, and presents a good ‘breathing’ opportunity, in essence a ‘dip’. While many traders would view a correction as the end to a bull market, many seasoned traders see this as a blue light special on isle 9! Time will tell, and if the opportunity presents itself – which side are you on?
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