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Altos Trading Articles

Don’t Buy the Dip…
SELL THE RIP!

Originally Posted: January 9, 2023

January 9, 2023:

Jeff Tompkins here.

And recently, I keep getting the same question from my readers:  

Should I Look to be Selling the Rallies?

Yes. I've really emphasized all this year: The decade-long Bull market is over.

To me, this is a Bear market, with the S&P down around 20% and the Nasdaq down a lot more.

In bear markets, you want to treat those opposite of a Bull market where the mantra has been “Buy the dip” for the last decade plus.

But now we have a new strategy…

Don’t Buy the Dip. Sell the Rip.

This means paying close attention to simple moving averages for potential levels of support and resistance.

When this happens, we can often predict which way a stock is going.

After 10 years of a raging bull market, we are NOT buying every dip anymore.

We are Selling the Rally.

There will still be Bear market rallies, but they tend to be shorter lived.

It's just kind of the inverse or mirror of what happens in a Bull market.

You tend to get these pops that then find resistance and then sell off again.

So they tend to trick a lot of people.

That's why it's so crucial to map these levels out.

Let's take a look at the VIX, also known as the “fear gauge”.
It’s pretty incredible how the VIX remains as elevated as it has this year.

The VIX is really basing support around the 20 level, and the long-term average is around 18.

And I consider anything over 20 to be volatile conditions, particularly over 25.
So you'll see the major level at 25 on the VIX (yellow circles above).

That's why often when you get a bit of a sell off or correction and then a resumption of the uptrend, you'll often see the spike up in this 25 level and find resistance.

But then as things get more unstable, you'll see the VIX spend more time above 25 and then typically the next zone of resistance is between 35 and 40 (top yellow circles).

So at the time of this writing, we just broke 25 on the way down. And that's promising for the bullish traders.

If we can see that the VIX continue to move lower back into the 20 zone in conjunction with the S&P and Nasdaq breaking resistance levels, that's what we want to be watching near term.

So I want to see the VIX continue to come down towards 20, and I use this as a leading indicator.

Now of course, there are no guarantees in trading. But if it does break a support level, it'll often do that before the S&P 500 or the Nasdaq break through their resistance levels.

Look, here’s the bottom line…

If you want to be a successful investor, you MUST be aware of where the buying and selling is taking place, and ALWAYS be watching the horizontal support and resistance.

Map those out, keep them on your chart, and then correlate all of those levels to what's happening with the VIX.

And you've got a huge edge.

You're going to know with a high degree of certainty ahead of most people what is, on a statistical basis, higher probability of the market turning at a certain price point, especially on the S&P.

So again, I think if you watch that with the VIX, watch those levels with the VIX, it really gives you a clue.

And I think even an advanced indication oftentimes with the VIX.

So if we're in a downtrend and we get a bear market rally to the upside, look for a bounce in the VIX off of support, like at the 20 level or at the 25 level.

It going to give you a pretty darn good edge in the markets!

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