Is Anyone Still Buying the Dip?

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What happened to all the folks who wanted to “buy the dip?”

After the first significant dip in the market since the February decline, the dip buyers have disappeared.

And that’s the main problem with the “buy the dip” philosophy…

When it comes time to buy, you won’t want to.

But, this week’s sell off in the broad stock market is giving traders an excellent opportunity to buy in anticipation of at least a short-term bounce.

Technical conditions are now so stretched to the downside, that the risk/reward setup now favors the buyers.

Take a look at the following charts of the NYSE and NASDAQ McClellan Oscillators…

These oscillators simply measure overbought and oversold conditions.

For our purposes today, we’ll look at only the “oversold” setups.

The NYMO and NAMO are oversold when they are below the absolute level of -60. They are also oversold when they trade below their lower Bollinger Bands.

It’s rare for them to be below both of those conditions. It’s rarer still for both oscillators to be below both of those conditions at the same time.

In fact, the last time it happened was in mid-March. And, that proved to be an excellent buying opportunity.

Back in March, the S&P 500 had been declining for about six weeks. It had fallen 300 points, from 4170 to 3870. The NYMO and NAMO both stretched deep into extremely oversold territory.

One month later, the S&P 500 had recovered its entire decline.

Today, the NYMO and NAMO are in the same condition as they were in March. They’re both below their lower Bollinger Bands, and they’re both below -60.

This is happening after the S&P 500 has fallen 200 points in less than three weeks.

Admittedly, I am intermediate-term and longer-term bearish on the broad stock market.

There are fundamental issues that are likely to cause stock prices to languish for many months and years to come. But, that’s a topic for another day.

For now, with the proverbial rubber band stretched so far to the downside, I have to be bullish.

Traders should be buying this dip. They’ll likely be well rewarded in the weeks ahead.

Best regards and good trading,

Jeff Clark

How has buying the dip worked out for you in this market?

Let us know your thoughts – and any questions you have – at [email protected].