{"id":1540804,"date":"2025-06-09T22:50:00","date_gmt":"2025-06-10T02:50:00","guid":{"rendered":"https:\/\/bugaluu.com\/news\/?p=1540804"},"modified":"2025-06-09T22:50:00","modified_gmt":"2025-06-10T02:50:00","slug":"buying-the-dip-heres-a-technical-way-to-do-it","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/buying-the-dip-heres-a-technical-way-to-do-it\/1540804\/","title":{"rendered":"“Buying The Dip” \u2013 Here’s A Technical Way To Do It"},"content":{"rendered":"

“Buying The Dip” \u2013 Here’s A Technical Way To Do It<\/span><\/p>\n

\n

Authored by Lance Roberts via RealInvestmentAdvice.com,<\/em><\/a><\/p>\n

Recently, I\u00a0did an interview<\/em><\/strong><\/a>\u00a0about\u00a0\u201c<\/em>buying the dip\u201d\u00a0<\/em>in the market, which generated many comments. Most were,\u00a0\u201cYou\u2019re stupid;<\/em>\u00a0the market is going to crash,\u201d\u00a0<\/em>but one comment deserved a more thorough discussion.<\/p>\n

\u201cWhen buying the dip, how do you know when to do it, or not?\u201d<\/strong><\/em><\/p>\n

That is the right question.\u00a0Of course,\u00a0you will never know with certainty.\u00a0<\/strong>However, we can\u00a0use some rather simplistic analysis to improve our odds of\u00a0\u201cbuying the dip\u201d<\/em>\u00a0more successfully. But, before we get to the analysis, let me clarify one critical misconception.<\/p>\n

In recent years,\u00a0\u201cbuying the dip<\/em>\u201c<\/em>\u00a0and more vulgar variations\u00a0have often been\u00a0equated to\u00a0\u201cdumb money\u201d<\/em>\u00a0or retail investors, who are presumed to always\u00a0make a mistake. However, as investors, we need to rethink how we view\u00a0\u201cbuying the dip\u201d\u00a0<\/em>because the whole goal of investing is to\u00a0\u201cbuy low and sell high.\u201d<\/em>\u00a0As such, we need to analyze corrective processes in the market. Sometimes, a correction may appear over, but it is only the beginning. At other times, the correction is near completion, and our odds of\u00a0\u201cbuying low\u201d<\/em>\u00a0vastly improve.\u00a0But how can we know the difference?<\/strong><\/p>\n

Let me restate that neither I nor anyone else has a guaranteed method of\u00a0\u201cbuying the dip\u201d<\/em>\u00a0precisely at the bottom. That is not the goal of this discussion. This discussion aims to look primarily at two factors,\u00a0sentiment and technicals,<\/strong>\u00a0to improve the odds of\u00a0\u201cbuying low\u201d<\/em>\u00a0versus\u00a0\u201cbuying high.\u201d<\/em><\/p>\n

Sentiment<\/strong><\/h2>\n

Investor sentiment refers to investors\u2019 overall attitude or emotional outlook toward the stock market. Sentiment measures reflect the collective mood, whether optimistic\u00a0(bullish)<\/em>, pessimistic\u00a0(bearish)<\/em>, or neutral, based on market performance, news, psychological biases, and positioning. While we do measure sentiment through surveys like the\u00a0AAII Investor Sentiment Survey,\u00a0<\/strong>market indicators such as\u00a0put-call ratios and the volatility index (VIX)<\/strong>\u00a0are also essential to consider.<\/p>\n

In this regard, we constructed a broad sentiment gauge that includes retail and professional sentiment\u00a0(how they feel about the market),\u00a0<\/em>the put-call ratio, VIX, the percentage of stocks on bullish buy signals, and retail and professional allocations to stocks. This gauge is based on weekly data and is published weekly in the\u00a0#BullBearReport.<\/a><\/em><\/strong>\u00a0The following is a recent example of that gauge overlaid against the S&P 500 index.<\/p>\n

<\/a><\/p>\n

What should be evident is that when the gauge is above 80, particularly above 90, such has typically coincided with market peaks. However, when the indicator is at these levels, investors are generally exceedingly bullish and tend to be\u00a0\u201cbuying high.\u201d<\/em>\u00a0Conversely, when the indicator is at very low levels, investors are usually \u201cselling low<\/em>.\u201d<\/em>\u00a0However, history\u00a0shows that extremely low readings are generally better opportunities for\u00a0\u201cbuying the dip\u201d<\/em>\u00a0than not.<\/strong><\/p>\n

Why Sentiment Is Important<\/strong><\/h2>\n

There are several reasons why this is the case.<\/p>\n

Contrarian Indicator:\u00a0<\/strong>Extreme sentiment often signals reversals. When investors are overly bullish (e.g., excessive buying, high confidence), it may indicate a market peak, as most buyers are already invested, leaving little room for further gains. Conversely, extreme bearishness (e.g., panic selling, widespread fear) often marks market lows, as selling pressure may be exhausted, creating rebound opportunities.<\/em><\/p>\n

Herd Behavior<\/strong>: Sentiment drives herd mentality, amplifying price movements. At peaks, euphoria can lead to overvaluation as investors pile in. At lows, fear can cause undervaluation as investors exit en masse.<\/em><\/p>\n

Market Psychology:\u00a0<\/strong>Sentiment reflects psychological biases like greed and fear, which can disconnect prices from fundamentals. Understanding sentiment helps identify when markets are driven by emotion rather than value.<\/em><\/p>\n

Timing Entry\/Exit Points:\u00a0<\/strong>Investors use sentiment to time trades. For example, high bullishness may prompt contrarians to sell, anticipating a correction, while extreme bearishness may signal a buying opportunity.<\/em><\/p>\n

As shown, there are some good examples:<\/p>\n

Market Peaks:<\/strong>\u00a02007, 2017, 2019, and 2021 all exhibited sentiment readings above 90. While investors were clamoring to buy stocks, the high sentiment readings suggested that reducing risk and exposure was the better choice.<\/em><\/p>\n

Market Lows:<\/strong>\u00a0The index registered very low readings in 2009, 2011, 2016, 2018, 2020, 2022, and 2025. Each time investor fear was elevated and investors panicked, \u201cbuying the dip\u201d provided better outcomes.<\/em><\/p>\n

Using sentiment as a\u00a0\u201ccontrarian\u201d<\/em>\u00a0indicator can assist investors in better navigating potential turning points.<\/p>\n

However, it\u2019s not foolproof and should be paired with other analyses<\/strong>.<\/p>\n

Sentiment Is Reflected In The Price<\/strong><\/h2>\n

Notably,\u00a0\u201csentiment<\/em>\u201d can also be analyzed in ways other than measures of\u00a0\u201cfeelings\u201d<\/em>\u00a0or allocations. We can also measure sentiment by analyzing the market price, which reflects the imbalance of buyers and sellers in the market at any given time. In other words,\u00a0while\u00a0<\/strong>there is a buyer and seller in every transaction, the\u00a0<\/strong>\u201csupply and demand\u201d<\/strong><\/em>\u00a0of those participants\u00a0<\/strong>determines the price.<\/strong>\u00a0Let me explain.<\/p>\n

Imagine two rooms with 100 individuals each who want to buy shares of ABC stock. Room A has 100 individuals who currently own ABC stock, and Room B has 100 individuals with cash who want to buy shares of ABC. The table below shows a very simplified model of this process.<\/p>\n

<\/a><\/p>\n

At $10 a share, there are numerous buyers but\u00a0few sellers.\u00a0<\/strong>The demand for the shares drives the price higher, which entices more sellers.\u00a0<\/p>\n

As long as the demand for shares outpaces the supply of sellers, the price rises.\u00a0However, at some point, the price reaches a level that exhausts the supply of buyers.\u00a0The subsequent price decline occurs as sellers have to begin lowering prices to find buyers.<\/strong><\/p>\n

So, \u201cYes<\/em>,<\/strong>\u201d\u00a0for every buyer, there is a seller<\/strong>.\u00a0But the question is always,\u00a0\u201cWhat price?\u201d\u00a0<\/em><\/strong><\/p>\n

Since the\u00a0\u201csupply\/demand imbalance\u201d<\/em>\u00a0determines the price, it is logical that\u00a0investors can determine what\u00a0\u201cprice\u201d<\/em>\u00a0buyers and sellers have previously been most active at by using historical prices. Hence,\u00a0\u201coverbought\u201d\u00a0and\u00a0\u201coversold\u201d<\/em>\u00a0conditions determine the risk\/reward of owning stocks. Technical analysis helps measure these imbalances.<\/p>\n

How Can We Measure Price Imbalances<\/strong><\/h2>\n

Technical analysis uses historical price and volume data to identify patterns and signals that suggest when stocks are overbought\u00a0(likely to correct downward)<\/em>\u00a0or oversold\u00a0(likely to rebound upward)<\/em>. By analyzing these conditions, investors can make informed decisions to reduce risk or capitalize on buying opportunities. Tools like Bollinger Bands, RSI, MACD, Stochastic Oscillator, volume, and others can help investors visualize where previous similar conditions resulted in either a correction or a\u00a0\u201cbuying the dip\u201d<\/em>\u00a0opportunity.<\/p>\n

Our analysis combines these indicators into a single index to help confirm current market conditions. As with the sentiment gauge above, we publish a\u00a0\u201ctechnical gauge\u201d\u00a0<\/em>weekly in the\u00a0#BullBearReport<\/strong>. This gauge combines the abovementioned indicators into a single index using weekly price data. The reason for using weekly data is that it slows price movements to provide a clearer picture of market sentiment. Again, as with the sentiment gauge above, the\u00a0Technical Gauge\u00a0<\/strong>signals potential market peaks\u00a0(readings above 90)<\/em>\u00a0and seize opportunities of\u00a0\u201cbuying the dip\u201d<\/em>\u00a0at potential lows\u00a0(readings below 20)<\/em>.\u00a0However, investors should integrate technical signals with fundamental analysis and sound risk management to avoid false signals and optimize outcomes.<\/strong><\/p>\n

The chart below is a recent example of the gauge. It is worth noting that the best\u00a0\u201cbuy the dip\u201d<\/em>\u00a0opportunities occurred with readings below 10. Those readings happened at the bottom of the market in 2002, 2009, 2011, 2018, 2020, and April 2025. In every case, that was the market low and rallied significantly higher following those readings.<\/p>\n

<\/a><\/p>\n

What is important to note\u00a0<\/strong>is that the exact dates on which the market was deeply oversold on a purely sentiment and allocation basis\u00a0(shown above)<\/em>\u00a0also coincided with deeply oversold technical conditions.<\/strong>\u00a0Investors are emotionally driven, and during price declines,\u00a0\u201csellers\u201d<\/em>\u00a0eventually exhaust themselves. As noted above, with a lack of sellers,\u00a0\u201cbuyers\u201d<\/em>\u00a0can enter the market at lower prices and begin to reverse price trends.<\/p>\n

The problem is that\u00a0\u201cbuying the dip\u201d<\/em>\u00a0isn\u2019t easy.<\/p>\n

\u201cBuying The Dip\u201d Isn\u2019t Easy<\/strong><\/h2>\n

In hindsight, it is pretty easy to see that using these tools to enter or exit the market benefits investors. However, in real time, it isn\u2019t easy. This is because we become the two primary behavioral biases:\u00a0herding\u00a0<\/strong>and\u00a0loss avoidance.<\/strong><\/p>\n

When markets are aggressively rising, and the sentiment and technical gauges are at very elevated levels, investors don\u2019t want to sell because\u00a0\u201ceveryone\u201d<\/em>\u00a0expects the market to go higher. The media erupts with headlines about the \u201cbull market\u201d and provides all the rationalizations that feed our\u00a0\u201cfear of missing out\u201d<\/em>\u00a0on further advances. With the\u00a0\u201cherd\u201d<\/em>\u00a0<\/strong>chasing stock prices higher, we fail to take profits and reduce risk.<\/p>\n

Conversely, when both measures signal a deeply oversold market, we find reasons to dismiss\u00a0\u201cbuying the dip,\u201d<\/em>\u00a0due to fear of further losses.\u00a0Unfortunately, investors generally sell at the lows, trying\u00a0<\/em>to\u00a0\u201cavoid further losses.\u201d<\/em><\/strong><\/p>\n

Crucially, these behaviors amplify market extremes, causing investors to buy high during herd-driven rallies and sell low due to loss-averse panic. This is why both measures discussed above, sentiment and price analysis, directly visualize these behaviors. However, while \u201cbuy low, sell high\u201d\u00a0sounds simplistic, it is challenging to execute in real time. This is why we regularly discuss the importance of\u00a0\u201ccontrarian investing\u201d<\/em><\/strong><\/a>: to counteract the psychological, emotional, behavioral, and market-driven factors that plague investor outcomes.<\/p>\n

Waiting For The Right Opportunity<\/strong><\/h2>\n

The biggest challenge for investors is always\u00a0being patient and waiting for the\u00a0\u201cfat pitch.\u201d<\/em>\u00a0\u00a0When we examine the sentiment and technical indicators in more detail, we find their validity is at the extremes, not in the middle. In other words:<\/strong><\/p>\n

\u201cThe\u00a0\u201cherd\u201d\u00a0tends to be right\u00a0in the middle of a move but wrong on both ends.\u201d<\/strong><\/em><\/p>\n

With both weekly technical and sentiment measures in the middle, and the market rising, the odds favor a market that will continue to increase further.\u00a0In other words, don\u2019t bet against the bulls during a bullish trend in the market, and vice versa.<\/strong><\/p>\n

However, as markets become more extended technically and sentiment becomes more bullish, \u201cbuying the dip\u201d<\/em>\u00a0becomes less profitable and more risky. In the example, volatility increases as sentiment reaches higher levels. This is because buyers begin to lose control over demand as sellers increase. While momentum tends to carry prices higher, the gains of buying with increased bullish sentiment are far less than buying when sentiment is exceedingly bearish.<\/p>\n

<\/a><\/p>\n

However, waiting for that opportunity is the hard part. As we quoted in the linked article above on contrarian investing:<\/p>\n

\u201cResisting \u2013 and thereby achieving success as a contrarian \u2013 isn\u2019t easy. Things combine to make it difficult;\u00a0including natural herd tendencies and the pain imposed by being out of step,\u00a0particularly when\u00a0momentum invariably makes pro-cyclical actions look correct for a while.<\/strong>\u00a0(That\u2019s why it\u2019s essential to remember that\u00a0\u2018being too far ahead of your time is indistinguishable from being wrong.<\/strong><\/em><\/p>\n

Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one \u2013 especially as price moves against you \u2013\u00a0it\u2019s challenging to be a lonely contrarian.\u201d<\/strong><\/em>\u00a0\u2013\u00a0Howard Marks<\/em><\/p>\n

As investors, we must focus on the things that continually lead to poor outcomes.<\/p>\n

Avoid the \u201cherd mentality\u201d of paying increasingly higher prices without sound reasoning.<\/em>
\n\tDo your research and avoid \u201cconfirmation bias.\u201d\u00a0<\/em>
\n\tDevelop a sound long-term investment strategy that includes \u201crisk management\u201d protocols.<\/em>
\n\tDiversify your portfolio allocation model to include \u201csafer assets.\u201d<\/em>
\n\tControl your \u201cgreed\u201d and resist the temptation to \u201cget rich quick\u201d in speculative investments.<\/em>
\n\tResist getting caught up in \u201cwhat could have been\u201d or \u201canchoring\u201d to a past value. Such leads to emotional mistakes.\u00a0<\/em>
\n\tRealize that price inflation does not last forever. The larger the deviation from the mean, the greater the eventual reversion. Invest accordingly.\u00a0<\/em><\/p>\n

Being a contrarian does not mean always going against the grain regardless of market dynamics.\u00a0However, it does mean that when\u00a0\u201ceveryone is bearish,\u201d<\/em>\u00a0that is often when\u00a0\u201cbuying the dip\u201d<\/em>\u00a0is the most opportunistic.<\/strong><\/p>\n<\/div>\n

Tyler Durden<\/a><\/span>
\nMon, 06\/09\/2025 – 18:50<\/span><\/p>\n

\u200bhttps:\/\/www.zerohedge.com\/markets\/buying-dip-heres-technical-way-do-it<\/a>\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"

“Buying The Dip” \u2013 Here’s A Technical Way To Do It Authored by Lance Roberts via RealInvestmentAdvice.com, Recently, I\u00a0did an interview\u00a0about\u00a0\u201cbuying the dip\u201d\u00a0in the market,…<\/p>\n","protected":false},"author":0,"featured_media":1540805,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1540804","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-news","wpcat-1-id"],"_links":{"self":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1540804","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/comments?post=1540804"}],"version-history":[{"count":0,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/posts\/1540804\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media\/1540805"}],"wp:attachment":[{"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/media?parent=1540804"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/categories?post=1540804"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bugaluu.com\/news\/wp-json\/wp\/v2\/tags?post=1540804"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}