To buy or not to buy, that is the question…

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We’ve had a pretty brutal start to the year and for those of us who have not capitulated and ‘hodled’ it’s been a little tense to say the least. Two years ago we saw the most brutal market sell off in its history where the DJIA (Dow Jones Industrial Index for those not used to the acronym;) dropped 11579 points over 33 days. A move that even Warren Buffet said he has waited his whole life to see.

As a comparison, since January 6th ‘the Dow’ has dropped over 5600 points. While not near as brutal as the covid inspired sell off in February 2020 it has still been just as relentless, particularly to the tech sector which has seen some high flying names decrease as much as 90% in value.

As the landmark Apple sold off last Thursday, analysts saw capitulation and determined the short term bottom was in. Others haven’t agreed because the Vix didn’t top out at 40 or above. Both of these moves are classic ‘signals’ of sound bottoms. So where does that leave us now? To buy or not to buy, that is the question.

This question has me in a few knots as I really messed up in March of 2020 when I refused to believe the bottom was in and kept shorting until it was painfully obvious that it was and I was wrong, missing out on some nice profits and great entries. The ‘rule of three’, where you have to have a minimum of 3 touch downs on the daily or 4 hour chart before you can call it a bottom didn’t really occur. It just reversed. And with conviction.

Last Thursday we saw buyers step in just as Apple was selling off. Friday saw a large influx of new buyers, albeit without killer volume to match the daily reversal ‘signal’ witnessed on all three major indexes. Once again two contrary indicators: low volume but a reversal signal. No clear info there.

The short term headwinds are still strong. Finland and Sweden have agreed to join NATO. This will frustrate Putin even more and make him more dangerous. The supply shocks and inflation seem to have peaked but any number of factors can throw them off at any moment.

Tailwinds include Jerome Powell’s comment Friday that the Fed may consider offering more mortgage backed securities or Quantitative Easing (QE) in September if the market appears to still be vulnerable. That would be a significant liquidity boost to the final quarter. Every single person I know including myself seem to have the Omicron virus so herd immunity may have been reached, barring a more deadly variant coming out of somewhere and shutting the world down again. Major earnings are in and the worst has been priced in so it may just be full steam ahead from here.

Yet I can’t help but still feel that unease in my stomach as I buy this dip. I won’t be as foolish as to keep shorting like I did in March 2020, but I think caution should be the immediate play.

I’d like to see some significant resistance zones breached before I am going all in. I’m also going to tighten my risk positions and Stop Losses until I see those zones supported. Why? Because it seems that 2022 is the year that anything can happen, including nuclear war, famine, climate disasters, runaway inflation, and a global default crisis, just to name a few black swans floating out there in the lake.

So my humble opinion, and it’s just that, an opinion, is to buy the dip cautiously. Don’t go all in just yet. Wait for resistance zones to be breached then position up and for God’s sake keep your stop losses tight! I’m going to keep my daily playbook neutral right now and prepare for another short, but I won’t be so naive again to think that the bottom is not indeed in ;)

Happy Trading everyone!