November 08, 2006 at 12:29 pm | | Comments 3

3 Keys to Buying Dips

The nature of the current market environment is unique in that we have an interesting dynamic at play. Like trick-or-treaters on Halloween night, the dip buyers are out in full force! We’re not seeing very many rests within this powerful uptrend, and that means there are a LOT of temporary dips out there which are being viewed as buying opportunities.

Does that mean that you can just step up and buy any lower prices on any stock you see which is heading south on the charts? No way. For one reason, we’re most of the way through earnings season but we still have plenty of companies which have yet to report. That means potential land mines, which is one reason you can’t just buy any weakness. Another reason is that some stocks have indeed topped out and their runs are over. They’re going into hibernation and may not return to the light of day until next spring (or later!).

So what is a trader to do?

Here are 3 keys to consider when buying dips right now:

1) Look for support. This could be in the form of actual price support on the chart when a stock pulls back to a prior trading range or previous low, or it might mean a pullback to a key moving average within an uptrend. If higher lows are in place or you see an area of recent support, that means the buyers are lurking and that should help to keep the stock afloat.

2) Enter and exit in pieces. Make a partial buy as a stock returns to a support zone. You don’t have to go “all in” on the dip, and in fact it is often better to initiate a ‘pilot’ position to establish a trade in order to gauge the stock’s health on the front end of the trade. If the pullback continues, it will hurt a lot less! And of course if the stock finds some buying interest, you can quickly add to your position to capture continued strength. As your trade begins to work and you find yourself with “company” in the trade (others have bought the dip and the stock bounces), take a little bit off. Sell a chunk into the strength and get out in pieces on the way back up.

3) Have a plan. There’s no substitute for having a specific trading plan for every stock you enter. Be patient as you seek out new opportunities and take the trades which will offer you several times profit what you’re planning to risk. And finally, know exactly at which point you’ll sell your shares if the dip turns into a downturn. If the time comes when that level is reached, don’t delay and exit your entire position right away.

I’m adjusting my trading right now to incorporate more dip-buying techniques, so if you’d like to learn more about how I’m trading this market right now, drop by and start your free trial today!

Jeff White
President, The Stock Bandit, Inc.