Should You Buy Wednesday’s Dip?

The tumbled 1% Wednesday morning after a monthly inflation report came in unexpectedly high at 3.5%. This elevated result pretty much eliminates the possibility of a near-term Fed rate cut, and investors were disappointed.S&P 500 Index-Daily Chart

As bad as that start sounds, the selling never really got carried, and we spent most of the session trading sideways, closing pretty much where we opened. And not just that, the index held recent lows and we remain at levels that were record highs just a few weeks ago. When put that way, reality isn’t nearly as bad as Wednesday’s -1% headline number makes it sound.

In trading, it’s not how the day starts but how it finishes that matters most. And by that measure, Wednesday was a decent day. We took our big lump at the open, but after that, nothing much happened because most owners chose to keep holding their favorite stocks despite the inflation headlines. Without a follow-on dash for the exits, stocks held the early lows, and the day didn’t get any worse. By that measure, Wednesday’s close was constructive, with very little panicked selling or urgent profit-taking.

That doesn’t mean the selling can’t continue Thursday, but every hour that passes without a waterfall selloff decreases the odds of a waterfall selloff.

As for how I traded Wednesday’s dip, readers will remember that Tuesday night, I had a partial position with stops at my entry points. Tuesday’s midday dip knocked me out of my position for breakeven and I arrived Wednesday morning in cash. Given how we opened, that wasn’t a bad place to be.

But rather than jump on the bear bandwagon and short the opening weakness Wednesday morning, I waited to see if the selling would stall, which it did. As I’ve written previously, this is a strong market, not a weak one. That means giving the rally the benefit of the doubt until proven otherwise. And I didn’t see anything Wednesday morning that changed that. In fact, the early resilience further confirmed this outlook and I spent most of the day looking for a dip buying opportunity.

I wanted to buy a nice bounce into the close, but instead, the market muddled into the close. While that was still a decent result, it wasn’t enough to convince me to put my money at risk. I stayed in cash and will reevaluate Thursday morning, where I will buy decisive strength, short a waterfall selloff that undercuts recent lows, or most likely, sit on my hands as the market continues trading sideways.

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