Is The “Buy the Dip” Crowd Facing A Rough Road Ahead?

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by Steven Sarnoff

Those who drive down the gritty paradise that is the Baja may recognize this stretch of road found south of Margaritaville San Felipe.  Drivers are warned as they approach a “zona de vados” to moderate their speed, because hitting a dip with velocity can end up being fatal.   So to, a trader must see the signs to know when conditions are clear and when to proceed with caution.  Blindly taking up positions may wreck your portfolio.

We’ve been making this drive for a quarter century and each time we embark, friends advise me to drive carefully.  I’ll thank them and invariably quip that they shouldn’t worry, because I don’t want to become the first Star of David along that lonesome highway.

For 7 1/2 years now, traders and investors have done well to buy dips in stocks.  The following chart by the Leuthold Group shows the current bull move in the Dow Jones Industrial Average (DJIA), since March of 2009, has climbed into the top three lengthiest bull markets since 1900.

 

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This weekend’s news will report that stocks were up from a week ago and up for the year.  But a picture is worth a thousand words and the daily candlestick chart of the blue chip index ETF (DIA) below paints a telling picture.

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You can see the Dow looking toppy throughout the summer, then break down with a gap and long black candle on September 9th.  The snap back bounce on Monday, the 12th, cheered by so many dip buyers, was rejected by resistance (supply).  Broken support, from the 20 and 50-day lines of average price movement, now represents resistance.

Sarnoff’s bottom line is that the overall negative character of the behavior of market price movement tells us, until proven otherwise by price action, sellers have the advantage.  They are driving price direction.

I see technical resistance at 18,200-18,600, basis the DJIA.  Seasonal influence, a firming US dollar, and the return of volatility may come to weigh on the venerable index over the weeks ahead.  The market appears to be entering its own dip zone and eyeing a move to test buyers’ mettle at underlying support (demand), residing around the late-June gap and 200-day moving average, at 17,000-17,500.

Subscribe to Options Hotline today to see how we continue to navigate over uncertain road conditions with a steady hand on the wheel.

Best regards,

Steve

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