If It's Raining in Brazil, Buy Starbucks by Peter Navarro

Author:Peter Navarro
Language: eng
Format: mobi
Published: 2012-06-11T09:33:00+00:00

SHOULD YOU BUY ON THE DIPS OR BUY ON THE PEAKS?

Because this point is such an important one, I want to digress briefly now and talk more about one of the great strategic debates that perennially rages in the stock picking world. This debate revolves around the issue of whether you should buy high and sell higher as Dietrich was trying to do on his breakout play or, alternatively, whether you should buy on the dips and sell on the peaks as so many bargain hunting investors attempt to do.

In fact, either strategy can make you a lot of money-or lose you a lot of money. The trick is to choose your strategy based on the appropriate market context. And that's where a macrowave perspective can be so very helpful.

Let's look at the buy-on-the-dips, sell-on-the-peaks strategy first. This can be a moneymaking strategy-but only if the stock market is in a socalled trading range. In a trading range market, stocks themselves as well as the broad market indexes tend to move up and down within a clearly identifiable range. During such a time, the buy-on-the-dip, sell-on-the-peak trader can often eke out a nice little profit exploiting cyclical movements within this range. In contrast, in a trending market, both stocks and the broader market indexes will continue to exhibit cyclical price movements. However, in addition to those daily movements, there is a weekly or monthly upward or downward movement in the overall market. In this kind of trending market, the buy-low, sell-high investor can get absolutely killed for two reasons.

First, the only stocks that will keep finding their support levels or lows are the ones that are most likely to go against the trend and dip further. In other words, buying on the dips in an upward-trending market is a perfect recipe for picking losers. Second, and even worse, selling at the peaks in an upward-trending market is to miss the real meat of a profit move when a stock breaks through its existing resistance level, trends upward with the broad market trend, and finds a new peak. In this scenario, the buy-low, sell-high investor winds up violating one of the most important principles of macrowave investing, which is to let your profits run.

Now what about Dietrich's buy-high-and-sell-higher approach? This strategy is predicated on a so-called stock breakout. Such a breakout can occur when a stock finally bumps through an area of resistance and reaches a new high, while a breakdown occurs when a stock finally falls through a level of support and reaches a new low. Technical traders like Dietrich love to go long on such breakouts and sell short on the breakdowns because once a stock finally does break free of its support or resistance chains, it is likely to enjoy a strong move. Indeed, this buy-high, sell-higher philosophy is one of the important linchpins of the Investor's Business Daily approach to investing which is followed by millions of investors.

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