When do I buy?

I’ve been getting tons of questions on Twitter…

“You going to buy this dip?”

“Was that a Vix spike?”

“Will the finnies rally tomorrow?”

“I need to buy something, anything, what should I buy?”

… wow, tough questions.  I guess a lot of people want to buy the dip, but just aren’t sure, right?  I know many of you were probably thinking that as the NDX and SPX dropped over -5%.  Even I was thinking that too!  Hey, that’s fine… that is, if it’s only for a hedge on an already beefed up short position. See, I still don’t like the idea of going net long.  As long as we live under the 200 day, the short side will be the winning side.  Almost every long I had that reached my list early January are now wiped out.  The interesting thing though, while those longs were showing up on my scans, my short list was not shrinking.  The only short I got a cover signal for was EGO.  Look what happened to some of my favorite shorts on Terrible Tuesday.  MELI down nearly -20%, NILE at a new 52-low, DRYS is back to where I covered it, and ARTC down -30% after being down -20% on Friday.  Wow.  Did that work out for the dip-buyer?  So, to answer you longer / medium term swing traders, the answer is that you DON’T want to get long on a tape like this. Your attempts at being a hero will only get you smashed (read my “Sisyphean Rally” Theory Here.  The November-January rally looks to be like a confirmed Sisyphean rally halted.  More on this over the weekend.)

For you short term swing traders, I also suggest you avoid carrying heavy overnight longs.  There are cases where you can play overnight trades, but that only works if you are “letting the rest ride” from an already profitable trade.  This is very important!  There’s a HUGE psychological difference.  A person who has a winning trade, then lets half of it ride into the next day has more focus and much more advantage than a person that buys initial position just before the close with no cushion.  Of the two, who do you think sleeps better at night?

This leads me to my third option, which is the one I have been playing since late 2008.  Basically, it is to NOT enter countertrend plays in hope that the next day rallies (ie, despite the market being down -300 points, I entered no longs.  However, if I had a large short position, I would have entered longs as a hedge).  Rather, I simply wait for the next day for a CONFIRMED intraday counter trend rally. Buy about 2-3x your swing trade position in the direction of the trend and sell 2/3 at the end of the day leaving the rest as an overnight.  This is far more better than “guessing the bottom” (or top) type trades where people wait for the close to buy the dip.  Sure they get it right some of the time, but this type of guessing rarely gives a good return.

… so, to apply all that into what our market, despite holding only shorts, I look to get long to protect my short-bias position.  Therefore, if I see BAC reverse, or the VIX spike then reverse, then I will load up on FAS intraday.  Actually, I’m waiting for late Thursday for short-covering, and also late Wednesday to see if selling slows.  Again, I am going through the same checklist I go through in search for possible countertrends to see if I need to exit a position, or make a daytrade (see post “How to spot rare day trading days”).

What all I explained comes down to, is that it’s just a complex way of position-sizing.  If you are looking for something to buy just to buy, then don’t buy.  You need to remove your emotions first.   If you’re buying on a hope, you need to shutdown your computer and come back next week.  There are always opportunities to trade, don’t force one just because you missed one.  How many times do I see people make that mistake (including myself!).   One thing I do want to point out, is that some leaders are still holding ground, like schools and medical, so that’s making it difficult to enter new shorts.  Oh yeah, and although the VIX got over 55 Tuesday, look how it got there… slow and gradual intraday.  That looks like gradual panic.  Remember, we want spikes!  So even that fact makes it hard for me to go long.  Going back to my poker analogy, its starting to look like the next card on the flop is either a Queen or King, giving the bears the advantage.  But I won’t reveal the card until the end of the week… who knows what the market will do until then.

There’s blood on the street… now go out there and make money!

Aloha,

-gio-

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