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Buying All Dips The One True Way?

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...the fact of the matter is that there have been long periods of time where the market has not beaten inflation, where it has not returned one's principal.

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I wish it was Sunday
'Cause that's my fun day...
It's just another Manic Monday.
-
Manic Monday (The Bangles)


Have they made a believer out of you yet?

Is there anyone who hasn't been converted to the buy-the-dip version according to Saint Ben and the choir boys in the Working Group?

With Monday's recovery is there anyone left who hasn't been proselytized to about the belief that since it's impossible to "time the market" and that since the market always comes back the best path to take in the market is just to buy and hold? And hope.

And hope. Because the fact of the matter is that there have been long periods of time where the market has not beaten inflation, where it has not returned one's principal.

Mr. Market's resiliency breeds a religious-like fervor about buying all dips.

The March "bear" lasted all of two weeks. The July/August escapade was just shy of a month. Will the current "opportunity" be carved out in a week's time when all is said and done?

After Friday's large range downside extension to 1,500 S&P support, many market participants were poised for a first hour low. Certainly hot money trading shorts were going to nail down their profits on any down plunge. After all, this has been the learned behavior for, well, twenty years.

After every Friday crashette since 1987, the indices have not seen follow-through for much beyond the first hour the subsequent Monday.

The rally attempt after a first hour plunge, the initial rally attempt, the test that traces out a higher low intraday, and the rally back that recaptures support (in this case 1,500 S&P) was text book. It occurred with precision, clock-like regularity; almost too much precision, like taking candy from a baby. Of course, it could have played out differently. But when the first hour low wasn't violated, it was a better than average likelihood that a snapper afternoon was in the cards.

Trouble is I get a little suspicious when things appear to be quite so easy and scripted. When babies are so co-operative.

Like the mainspring of some kind of celestial machine, the popular path to trading riches played out again on Monday --- like a casino where the winnings are comped and the drinks must be paid for.

If insanity is doing the same thing over and over again while expecting a different outcome, then it would be insane to think that a Black & Blue Friday/Monday scenario would hammer the market with follow-through ---especially in October, on the 20-year anniversary of the worst shiner in the history of stocks.

The popular and proper stance was to assume that a down open would see a rally attempt because that's the way post Freaky Fridays-Manic Mondays always turn out. Everybody knows that lightning doesn't strike twice and that anniversary dates don't mean doodley, right?

Hoofy snatched victory from the jaws of defeat on Monday. But one day does not a trend reverse. The rally attempt on October 17 to the 1550 resistance showed what happens when a reversal attempt fails and the market slingshots back down.

So far, it's been a textbook pullback to the breakout point as shown by the retracement by the S&P to the August high and the early September high at 1500. Ditto the retracement in the Naz to its breakout point.


Click here to enlarge.

Is the S&P tracing out a classic pullback to the breakout point, C? Note the pullback to the August high, A, and early September high, B, both at 1500. Any failure here below the 50 dma and the 200 day suggests another leg down has begun.

The behavior of the market on its first snapback to resistance as reflected by the S&P between 1513 and 1520 over the next day or two will determine whether Subprime Evil, The Sequel, will be coming to a theatre near you this Halloween. The Fed Jack O' Lantern and the fiscal year end for many large institutions looms on October 31.


Editor's Note: Want more of Jeff's insight and trading ideas delivered to your inbox daily? Minyanville is proud to announce that we have launched Jeff Cooper's Daily Market Report, complete with Jeff's day trading and swing trading setups. Email Josh Sander for more details and how to sign up.
No positions in stocks mentioned.

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