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"Buy the dip" is a phrase you hear tossed around a lot... but so is "don't try and catch a falling knife."
How do you tell the difference? That question's especially important now that a recovery from this month's lows has up and turned into a re-test of the market's technical support.
Well, as I'll show you in a second, when you have a good chart, it's easy to tell the difference between a genuine buying opportunity and, well, a falling knife.
I've got a good one for us today...
Here's Where the Market Will Go Next
I love the Russell 2000 index of U.S. small caps, or, more to the point, the iShares Russell 2000 ETF (NYSEArca: IWM) that tracks the index. It can tell you a lot about what you need to know, and when the time is right, it makes a heck of a good profit play itself.
Small caps are a risk-on, gung-ho kind of sector that reflects the health of the U.S. economy and the average investor's appetite for risk. When it's a little anemic, chances are we're in for a pullback; time to get short. And when IWM is rockin' and rollin', it's an excellent sign of a bullish trend.
The IWM is telling us in no uncertain terms that the forecast for the immediate future is bullish, because it's punched through support at its 50-day moving average and is in fact in oversold territory. We saw similar activity in early March, but the "risk-on" index bounced off the mat quickly and added fuel to the mid-March rally that took the S&P 500 back to its highs at the $3,900 level.
The IWM's condition is convincing proof that it's time to get gung-ho ourselves, but it's not the only bullish signal flashing right now.
The Chicago Board Options Exchange Volatility Index (VIX) has been pushing to break below $20 in a move that would see it unwind to the $15 range. Lower highs and lower lows are now being put in place, which suggests that the recent selling should be contained.
Not to mention, we're also seeing signs from the S&P 500 that now is the time to buy. It's once again testing its 50-day moving average for support.
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In addition, this trend line hovers just above the bottom of the bullish channel that has served as support for the market in November and during the early March selling. Thirty dollars for the SPDR S&P 500 ETF Trust (NYSEArca: SPY) shares will be the difference between the need for adding short positions to the market and a deep discount buying opportunity.
Last but not least, seasonality is certainly on the side of the bulls; the historical returns for the month of April are beyond strong. There are several reasons for this, but the biggie is the upcoming earnings season.
In an environment like this, with the charts being what they are, it's not all that hard to dodge that falling knife and spot the genuine buying opportunity.
This Stock Is the Real Deal, Trading at a Real Discount
Again and again, AMC Entertainment Holdings Inc. (NYSE: AMC) keeps showing up on my screens as a must-buy. As one of the most popular of the "recover and reopen" stocks, AMC has had a wild ride over the last few weeks.
That said, the stock is giving investors another opportunity to "buy the dip" on its way to my current target price of $20. That would represent a gain of more than 82% from today's levels, but, in all candor, I think $20 is probably on the conservative side.
Just a month ago, shares were available for a bit over $5 as the technical tide had started to turn bullish on AMC. The stock's 50-day moving average had just shifted into a bullish trend, but for too many investors, the questions of "when" AMC would start hosting moviegoers was just too vague to buy the trend.
Of course, we have our answer now.
With theaters reopening around the world, the stock ran up to $15 just last week. While the rally is strong, recent headlines pulled AMC shares back to their 50-day moving average for a quick touch-and-go technical test and another opportunity to buy the dip on this strong - and relatively volatile - bullish trend.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Straight-Up Profits. He also contributes to Money Morning as the Quant Analysis Specialist.