Your Best Shot at "Buy-the-Dips" Gains

The wise, respectable market watchers at the Wall Street Journal want to know, “Are you ready for the next market crash?”

And they’re not alone. The media are becoming obsessed with the possibility of a big drop in the stock market. Bloomberg News cited “concern over a severe pullback” as the reason for yesterday’s 0.7% drop in the S&P 500 and the Dow, and whopping 1.35% drop in the Nasdaq.

(That, by the way, marks the biggest one-day drop in the tech-heavy Nasdaq Composite since April. Ouch.)

But is the fear justified? Or is it just a good way to sell newspapers?

The big picture outlook is important, after all, it informs all of your other trading decisions.

Today, we’re turning to our trading expert Jonas Elmerraji for a glimpse at where the market might be headed. He’ll even reveal the best way for you to play it…

“It makes sense to start with a chart of the S&P 500,” Jonas begins. “And looking at the chart, it’s clear that even though investor uncertainty is running amok this summer, absolutely nothing has changed in the stock market in close to two years”

The S&P 500 Uptrend Since Feb. 2013

“In other words, the S&P 500 is still bouncing its way higher in a well-defined uptrending price channel. Despite all of the noise, we’re still in a “buy-the-dips” market…

“There are a couple of important takeaways from the S&P’s chart right now. The first is that every single test of that bottom trendline over the last year and a half (seven of them over that stretch) has been an extremely low-risk opportunity to buy stocks,” Jonas explains. “And they’ve paid off incredibly well so far.”

But even though we’re in a “buy-the-dips” market right now, we’re nowhere near a dip…

“The S&P is sitting towards the top of its price range – not near that sweet spot near the bottom of the channel,” Jonas concludes. “That means that a correction back down to support looks likely in the short-term. There’s a lot more risk between here and the bottom of the channel than there is potential reward between here and the top of the channel.”

Sure, that’s a red flag. But there’s a big difference between saying that the S&P is likely to correct 4.5% down to 1875 or so, and saying that we’re due for a crash.

The market looks like it could very well trickle lower this month as it searches for support. Now’s not the time to get aggressive on the long side…

Regards,

Greg Guenthner
for The Daily Reckoning

P.S. There’s a way you can make market volatility work in your favor. Sign up for the Rude Awakening for FREE today to see how you can trade these trends for huge gains…