Hey, this is Sasha, welcome to another episode of Hungry for Returns where I answer your trading and investing questions based on my own experience and knowledge.
If you have a question, be sure to submit it at https://tradersfly.com/.
Let’s take a listen to today’s question, which talks about buying the dip.
“Hey Sasha, I’m a subscriber for you, and my question is — I’m a long-term investor and when the big company such as Facebook, Microsoft, and all that big companies, when they dip for meager prices, I want to buy it. But the problem is — when should I buy it? How long I need to buy that stuff? Because you know by then, the deepest lowest price is very dangerous. How long should I wait in it? One week, two weeks, three weeks, one month, two months. Thank you very much.”
If we take a look at this question, we’re looking at buying the dip. When should you buy the dip on the stock?
Companies like Facebook over here, they’ll have these big dips. If you take a look over here, what we just did about August 30th, we had a significant dip percentage-wise. You’re looking at about 20%.
If you’re looking to buy these companies into the future, this is typically what you’re trying to do. When you buy the dip, there’s a couple of things you need to consider. I want to share with you four main points that I jotted down when you’re looking to buy the dip.
The first one answers the question directly of, how long should you wait until you buy the dip?
Let’s take a look at history. Typically, a consolidation phase is six to eight weeks.
That’s a typical sideways movement digestion phase. If you look at many stocks that are just moving sideways, pick any company, for example, that’ll move sideways on the trend. Six to eight weeks, this is average looking at history. Sometimes this could be a little quicker, and sometimes this could be a bit shorter. Look at any pullbacks distributions, those things. Six to eight weeks is a typical guideline.
Sometimes, it could be three, four months. Five, six months. Sometimes, it could be a couple of weeks.
But overall, when you have some massive movements in stocks and companies like Facebook over here. That can take a little bit longer. The same thing can happen when we look at Netflix. These significant pullbacks can take a little bit longer. So, you need to be more patient. The more violent things are typical, the longer it takes to digest things. Just like the more food you eat, the longer it takes to digest that food.
I want to share with you a couple of other three main points beyond this.
Just the timeframe and that is watching the restraint retracement.
For example, when you look at stocks like a Netflix here, you have to be very careful with this retracement.
By that retracement, I’m talking about the bounces that come shortly after that pullback.
Typically, those bounces are about 50%.
Now, here in Netflix right now, you can see it’s about a 30/34/38 percent bounce.
Look at the Fibonacci sequence and learn more about those, if you’re interested in fib levels, but that’s a typical sequence right there. It bounced to about a 350 level and then it pulled back even further.
If we take a look back at our Facebook example, which was directly in the question the same thing happens. We have a significant sell-off. We have a bounce of about 12%. Take a look, and we had a sell-off of about 23%. We had a bounce of about 13% and then we got further selling pressure.
I want you to be very careful here.
Get a follow-through
Point number two is that you might get a follow-through sell-off action or sell-off moment, just a couple of days or a couple of weeks later.
That’s what you want to be cautious about. You don’t want to be the guy buying right here — getting in and then it comes back. Sometimes, it even goes lower.
Distribute cash amongst multiple time frames
This brings me to another point right here — that is distributing your cash amongst numerous time frames.
If you distribute your cash, let’s say a little bit here and then also a little bit at even further lower prices, that will help you avoid piling in too much risk all at one time because you’ll never find and catch the bottom.
It’s very rare to do so, although of course, some people do every single day because there is a bottom. Some people do end up catching the bottom every single day. But most of the time, it’s tough to catch a bottom of a swing movement.
In either case, what you’re trying to do is distribute your cash, and that will help eliminate your risk.
If you want to take let’s say $12,000 and split it amongst 1000, every single month well that’ll get you at least partly away from the last couple of crashes, as far as time goes.
Look at a Descending Trendline
You could be a little more patient and get after it breaks that descending trendline.
You can do this on shorter-term scales as well.
Let’s say you’re looking at 2011-2012, and you have 2011 where we have a pullback. You could get an adjustable that break out of that descending trendline.
And of course, if you’re looking at individual stocks, you could use and try to get in after the breaks those points.
Looking at that Facebook example that we’ve used earlier, you can see the earlier 2008 February/March pullback, and the entry point was a little bit around the April/May time frame.
Now, the same thing, what you’ll want to do is looking at the most recent movement, and we draw that line. It’s a little steep. It’s too far to create it right now because it’s angled so steep. You’ll want to get a line maybe around an upward slanting normal healthy pullback. Somewhere around this level could be right now looking at it about 182, 185 180, if it breaks out above that point.
Anyways that’s what I would recommend is look at that kind of four points:
- How long should you wait –> six to eight weeks is a typical average distribution
- Distribute your money
- Look at the retracements of potential bounce and
- Watch the descending trendline there on this pullback
Of course, you’ll never find the bottom of just about any stock. It’s tough to do that very consistently, but hopefully, looking at it in this way with a couple of these points, it may help you reduce your risk.