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Time to Buy the Dip?

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A bearish momentum divergence between price and the fast average of RSI on the weekly chart tells us that the pace of the advance is slowing.

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The S&P 500 (INDEXSP:.INX) weekly chart shows an attractive long entry scenario and reasons to buy the dip. I believe position traders (two-week to 12-week time horizon) should be looking for what to buy and taking action here.

My focus is first on identifying all the equity-related ETFs that show a history of outperforming the S&P 500 and are trending well, and second on determining which candidates show the most compelling chart structures that are worth acting on.

I base my reasoning on a simple buy-at-mean set-up on the weekly chart. In uptrends, markets tend to extend gains during impulse phases during which progress is made, and they revert to the mean (defined by the 20-week simple moving average) after the price has gone beyond what fundamentals justify and short-term traders take profits on long positions. After a reversion to the mean, through a pullback or consolidation, the market is at a natural place to resume the larger uptrend, producing a buy-the-dip scenario.

Granted, this pattern isn't perfect. Some pullbacks go beneath the mean; they can even go down to the lower Bollinger Band (two standard deviations below). But you never get a free lunch in trading. Stop losses can be placed beneath 1627.5, which was the Wednesday low.

S&P 500 Weekly Chart


Click to enlarge

Keep in mind that this probably isn't the time to feel complacent about being long. A bearish momentum divergence between price and the fast average of RSI on the weekly chart tells us that the pace of the advance is slowing. (Even without the indicator, you can see this in how little headway was made above the May high before price came back down in August.) I often base my exit strategy for position trades on a downturn in the 20-week moving average, but in this case, I'll be advising readers to be a little quicker to take profits if the market does indeed recover in the coming weeks. Finally, although it's a good time to buy the dip, it's likely not a good time to push your luck.

Thanks for reading.

This article by Chris Burba was originally published on See It Market.
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