When you wait for a pullback to buy, there are two major things you want to accomplish:
- Buy at a better risk/reward entry point.
- Buy at a lower price.
Buying at a lower risk/reward entry point could be something as simple as buying when RSI is near 50 (the mid-point) rather than buying above 70 (“overbought”). If you look at the improvement in the market over the past two days, we have seen about 50% of what we would like to see prior to another leg higher (see table below).
Since we would like to see more and the risk of another move lower is higher than we would like, we did some very small percentage buying today relative to our account sizes. We want the market to take a fairly significant leg higher if we are going to put capital at risk. If another leg up has already started, then the vast majority of the boxes above will be moved to the “Yes” column within a day or two. If the boxes are not checked over the next few days, then another push lower could be in store.
We want to buy on dips, but we want to buy prudently on dips. As more boxes are checked, we will be open to buying in larger incremental steps. If we move lower, we will remain patient with our cash. Today’s investments/trades represent a form of fence-sitting in the short-run.