BUYING DIPS IN DJIA FUTURES
It is one thing to have a buy setup and it is another thing to get long
The above chart shows that we have a Vix buy signal in the S & P 500 yet we are free falling. What to do?
As tempting as it might be to try and pick a low when a market is dropping like this I have learned the hard way not to even think about trying to do that. A market setup as I have explained many times is just that. It is a circumstance that on average favors a certain outcome. That does not make it a buy at the market situation. You have to have some type of indication that the trend is turning back in your direction before you enter the trade. One simple thing you can look at is to wait for the VIX to close below it's open. I have marked the last two times we get extended like this and when the VIX closed below it's opening. You can see that was a decent way to time the entry. In spite of the fact that we are very over sold and the VIX is very over bought, we need to see some sign that the current momentum has reversed. I do not see any evidence of that at this point in any of the tools that I use.
If you are a longer term investor this could be a spot to start legging into a position and then plan on averaging down if we continue to decline. I have spent countless hours trying to find a reliable way of picking a bottom when we get a sharp decline like this and have never been able to do so. I do not bother trying any more.
The next chart is a trade we did in the Swing Trading Service recently. It is always easy to show a great trade and this certainly was one. All of the trades have not been like this and will not be in the future. However, we determined there was some weakness coming and tried to pick the market of all of those that were so highly correlated to short. We selected Crude Oil.
I was asked by some why we didn't short the ES. Take a look at the next chart and you can clearly see why we felt the Crude market was weaker.
We were almost at the highs of the year in the ES while we were a very long ways below comparable highs in Crude. This was a large divergence and even though the ES has fallen a lot Crude has fallen more. This trade went to it's target very quickly. Our goal in the Swing trades is to catch larger gains which typically takes a longer period of time. In this case we went there very quickly so we gladly said thank you and took our money. I alluded to this in the comments the other day. If you decide you want to go Hog wild and short across the board during situations like this it could pay off. However, if you happen to catch the trades wrong you have increased your risks exponentially since all of these markets from Gold to Crude to Stock Indexes to Grains to Currencies, are virtually the same trade.
I do not see any new shorting opportunities at this point since I am looking for a bounce. If you are short stay short and look for targets to exit. I think a bounce is going to come soon.