One strategy I’ve been employing lately is buying strength. While many have been successfully “buying the dip",” buying the dip can kill you if you’re wrong. I often prefer buying strength. Buying when the market is up and internals are strong.
I only started buying this rally on March 2nd. I mentioned that it was tempting to buy in early February when many of the major averages hit their 200 DMAs, but that it was also the time of the highest risk. The traders that bought back in early February have been rewarded for taking that risk. I took a pass and waited until China improved technically. In terms of timing, I don’t believe there was a right choice in buying back in early February or waiting until last week. It is really question of risk tolerance (although in hindsight, I do of course wish that I had bought in early February when I wrote the post linked to above).
Because I just got started on March 2nd (after being long in early January as well), I’m only 25% invested. At this point, I generally have my stocks and etfs picked out and it is just about increasing position size and timing it. And of course adjusting stops incase the music stops.
So what is the plan for deploying more capital? We’re starting to run up against resistance levels on the major indexes. The fib lines on this SPY chart highlight the resistance in the 115-117 range.
If we can break that resistance, we might be able to jump into the next box from 117-130. There will be bears that try to short this resistance as another top. There will be longs that bought in early February that want to take off profits. Momentum indicators such as RSI show that the market is overbought. A reason to sell? Not from my perspective.
I’m not going to make real money by buying a wiggle on March 2nd with 25% of my capital and riding it to March 12th. It’s been a great 10 days, but it is not going to make my year. What I have built over the last 10 days is a very nice cushion if the market sells off. I now have insurance. I can use this profit cushion to trade using profits rather than dipping into my capital.
So I’m passing on the option to sell here. My goal has always been to catch a multi-month trend rather than a 10 day run. Ultimately, that is what I’m gunning for. If my profits over the past 10 days evaporate than so be it. But do I add to my existing positions at these levels?
I would say that I’m going to take it easy here. I’m going to see if the major indexes can consolidate and break through this resistance. If the market continues higher, I’m only 25% invested but I’m in some high beta names and I believe I’m in the right names. So I’m still getting some pretty nice bang for what I’ve got deployed.
The dream scenario? I like to imagine a situation where the market starts consolidating at resistance over the next 2 weeks or so. We get a breakout over resistance in late March/early April. April gives us a good ride. In mid-May, after accruing a bag of money, I sell and go away for a while.