In a market that has spent the last one to two years breeding a ‘buy the dip’ mentality, it is important to have a set of rules to follow before blindly jumping into the upside.
One of our biggest rules when it comes to buying the dip is that we will not do so without a reversal to the downside in volatility.
Looking at the trend in the S&P 500 (ES) over the last few months (chart below), we have seen a series of flushes to the downside in May, June, July, August, and once again in September. In previous months, each of those flushes were met with a reversal and a rip back towards new all-time highs (ATH).
Visually, buying every dip in this incredibly bullish market makes a lot of sense. What you must understand is the relationship between that reversal to the upside in the indexes with the volatility index (VIX).
Before each and every one of those moves to the upside unfolded, they were triggered with VIX ‘throwing in the towel’.
In the current market, VIX has continued to grind higher. For this reason we suggest practicing patience here and avoiding getting long until these conditions improve. If there is ever going to be a dip that doesn’t bounce, it will be in the face of increasing volatility.
Until VIX dies down, we won’t be putting cash to work. There are a handful of good-looking setups in names like GOOGL, NVDA, TSLA, and MSFT here, but none of that matters to us in these conditions. Trading is a game of probabilities, and the following probabilities are forcing us to be patient here:
- If VIX continues to spike, the indexes will likely continue to trade lower.
- If the indexes continue to trade lower, then everything likely gets dragged lower with it.
Your best swing trading will take place when the overall market is providing ‘wind at your back’, and at the moment that is not the case. In the Compounding Growth Mastery, we are able to close profits in AAPL, NOW, GS, FB, IYR, XLC, and TSLA as a result of the wind at our backs. Until the conditions are supportive of the same environment, we will be sitting on our hands!
Next week is setting up to be an interesting one, so make sure to join us for our premarket prep on the Focused Trades YouTube on Monday, Wednesday, and Friday!
Stay Focused!