Sell the rip!

“Buy the dip. Sell the rip”. This is an expression used by traders. We’ve just seen a dip, and may now be ready for a rip. You read it here first. I think there’s a good chance for a rally possibly as early as next week! I also think that rally won’t last too long. In my view, it will be a trading opportunity. Buy the dip.  Sell the rip.

My evidence for that potential trade is below.

Sell the Rip!

Larry McDonald, notorious pro trader:

We are in “Sell the Rip” mode”.

The VIX

“VIX May (new front month) at 17.10 implies an avg daily move of 1.1% every day for the next 30 days (1 sigma).  I think we can get multiple days larger than that in the short term, and the intraday ranges PLUS overnight risk, should keep that (1%) average “sticky.”

Party’s over!

Below is the VIX chart. Pay attention, class. I want you to look at last fall’s high volatility levels (Sept/October). Then, note the low volatility in late 2023, early 2024. Now, note what the VIX has done from April to present. Are we in for a repeat of Sep./ Oct. 2023?

BTW  – my April 7th blog showed that the VIX predicted the current decline. You read it here first. 

 

 

Potential oversold bounce.

Below is my neartermed trading system. All 3 indicators (BB, Stochastics, RSI) are at near a “buy” signal. BearTraps notes above that the VIX has a current daily implied average volatility of about 1%. Given that this past week has seen a series of  1%+ DOWNSIDE days…we are likely due a few days of 1% UPSIDE. Especially in light of the oversold daily chart momentum and the trailing price along the lower Bollinger Band.

 

Back to the VIX.

Lets revisit the VIX levels in Sept/October last year–top chart. Then…Take a look at the SPX chart above.  What did the market do in Sept/October? Notice any similarities to current VIX and market patterns?

Answer: Last fall, the market

  • Fell in September, and VIX spiked
  • Rallied early October, and VIX stepped back a bit
  • Fell again over the remainder of October. VIX hit 21.

Summary:

Good chance of a rally in the next week or so, given the technicals and momentum studies.  The VIX may step back during that rally (should it occur).

There’s also a good chance that such a rally doesn’t last long. VIX rallies, stocks fall again. My SPX target remains 4800-ish. Then 4600 if that level fails.

I like cash. I like gold stocks. I like defensives. But we placed a small trade in a tech stock on Friday. We’re trying to make an oversold bounce trade in the next week or two. Buy the dip.

Sell the rip. You read it here first.

 

 

 

9 Comments

  • Hello Keith, thanks again for a nice piece of analysis. I’m glad to see that it match my short term view. I did take profits from my HQD trade Friday morning (+8%) as my analysis was telling me that many short term indicators on daily charts look very oversold. That said, like you, I don’t think that we are out of the woods yet, hence I can see a short term limited rally for a few days to a few weeks maximum… and then probably some more downside in May/June (seasonality helping). The main sectors where I see a potentialy oversold graph are Techno, HealthCare, Real Estate.

    However, I get an oversold view (short term) on gold, silver, materials in general, metals and mining stocks.

    Reply
    • Great comment Lou
      I think you meant overbought (not oversold) nearterm signal on gold metals materials etc? We very slightly reduced that in our accounts Friday.

      Reply
      • Exactly Keith, I saw my mistake the moment I posted the message above, but I couldn’t retrieve it and edit my post… I’m sorry. Like you pointed out, I meant ”I get an overbought view (short term) on gold, silver, materials in general, metals and mining stocks.”… which played very well on Monday (today) but there could still be room to go further… maybe.

        Keith, I find hard to integrate TA on many timeframes and come up with a clear verdict. For example, for weeks, I was waiting for a top/reversal signal on the main indices (S&P, NASDAQ, but also XWD (world))! The market was just going up too much and for too long. Finally, I got that Sell signal around the end of the 2nd week of April. I happily profited from a good trade last week but right away, on a daily basis, considering the bullish percentage and a few indicators, the market looked already due to rebound ! After only a few % down after so many % up over the past months. On a weekly basis, everything keeps telling me to stay short on the market (or at least being out of the market). But on a daily basis (indicators on daily charts + on the bullish % charts), it looked like the downward move of last week was already exaggerated! The markets did bounce back today (Monday).

        I know that this is very short term… maybe too much. But I’m having trouble with waiting for weeks if not month to get a signal on an overbought market and that 5-6 days later, it already looks like that could be it…

        I’m interested to get your opinion : do you position your holdings mainly on the weekly view and then consider the daily charts as additional information of vis-versa (or neither… depends on the situation)?

        Reply
        • Have you taken the Online course Lou? THIS IS A STRONG RECOMMENDATION TO DO SO IF YOU HAVENT ALREADY!
          But to try and answer in a simple way, I take a big picture weekly view using the big indicators (trend, SMA’s) and also my Bear-o-meter readings, which turned to first-level higher risk (3) score this month–correctly, I might add! See the blog early April.
          But within that big picture I may, or may not, choose to do high probability dip/rip trades. Mostly in our “Aggressive” strategy.
          So–right now, big picture remains 4800 on SPX, possibly lower. Neartermed is a rip–I don’t even have an opinion on how high for the SPX–so we are doing a couple of stocks with their own targets (5-10% upside possible in 1-2 weeks). That’s just based on the neartermed system (BB, RSI, stochastics) applied to daily chart. That, and some data I shared from BearTraps indicating 1% vol days. I put 2+2 together on Friday and figured we had a high probability “rip” trade coming with a series of possibly 1% days –then back to our regularly scheduled programing of SPX 4800.
          Take the course if you have not–very small investment in your trading success that will make the difference. Honestly, it is the single best thing I have created for investors – and I have created lots of content over the years (books, blogs, videos and webinars). Its my Opus Magnum, you might say!

          Reply
          • Thank you very much again Keith. I will take your course. I have been following you, reading every post and watching every video for a few years now. I’m taking into consideration your monthly Bear-O-meter reading (with a lot of admiration and gratitude cause it proved to be a great tool with great results), as well as the Pro-Eye reading from Larry Berman for my overall idea of the risk.

            I realized lately that my daily TA readings were giving me too many false signals. Sure when it works, it’s faster than the weekly signals but the numbers of false starts have cost me more than having taken a trade a little later for longer, based on the weekly TA. Currently trying to combine both timeframes to get the best combo possible but it’s not as easy as I thought. Often, they don’t match (Weekly tells you Buy, but daily tell you it has already gone up and now it’s a little overbought… then I wait to get in… weekly keep it’s Buy or Long signal, but daily turns on the bear side. then Weekly eventually reverse and say Sell, but daily is already oversold… etc.)

            Anyway, it’s always a passion and I love learning more. I’ll take your course and I thank you in advance. I understand that fundamental and sentiment is what is moving the markets, but technical analysis is what allows you to gest to ”read” of what’s going on (cause we’ll never be able to know everything.. in advance… on the fundamental basis). Tx again !

  • Thanks Keith. I like the fact that you put your money where your mouth is!
    Being in Gold,Metals AND dipping into Tech is something that I don’t see on MSM.

    All said and done, isn’t VIX still a lagging indicator?

    Reply
    • Yes, re the VIX it is coincidental mainly. My view is the technicals are screaming neartermed oversold.

      Reply
  • Good messaging Keith. So let me summarize what I understand, and also ask a follow on question.
    i) Short term rally, maybe a couple of % on the S&P
    ii) followed by a correction to 4800 (maybe 7%) or to 4600 (maybe 11%) (not a prediction, just a plan)
    So the question I have is not sure what plans would follow that? Sideways through the summer until the USA Fed signals the first rate cut? The cut along with the election results should rally into year end.
    My takeaway is after the short rally, sell for some cash, sit tight for the correction, and then what and when?
    Thanks

    Reply
    • Daddyo–right on. Anyone’s guess to how much we rally, but likely 5% or something like that. Your thinking and planning is completely logical. I don’t care how or why it happens, but the market is likely set for a period of weakness (beyond a neartermed rip), then….closer to election markets often rally. I take it as it comes, as you know. —This, rather than hope that everything falls into place according to some prediction I make!

      Reply

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