Still Much Easier to Buy the Dips Than the Breakouts

As soon as this bull run was more than 2 months old (or sooner), dips became easier to buy than breakouts on stock charts. Even today, with the PMI China excitement pop followed up by 10:30 with the positive US PMI data, the market is leaping. Short term breakout traders will buy the pop as for some stocks, this pop carried beyond a resistance point (for others it moved up to resistance ie a previous high and bounced back down).

But in this market, these breakouts are prone to be slapped down. Believe me, it’s annoying. The market is a game played by jacka*** who all sell when you’re buying and buy when you’re selling – and laughing all the way to the Hamptons. Therefore, on days like these, you really have to decide if these pops are a significant move or just more noise for the traders to profit from. Or you have other options.

Option B is to go with the move and have a tight stop – yes the traders might kick you out but if the move is real you’ll be in. Option C is to buy on drops, but not just any drop, a well-planned drop area that brought buyers in ┬áin the past. Also set a stop where the stock would only go if you are completely wrong about things (not too tight where the traders might get you).

Options B and C and their accompanying mentality might save you from the endless ‘buy the breakout hit my stop’ routine that many people run into.

Bottom line – understand that in the small to medium moves, traders will go against you seemingly right when you get involved. Be prepared and have a plan.