How to seize dip opportunities: a NVIDIA case study
Star stocks often show strong performance, tempting many investors who may hesitate due to perceived risks.
However, history shows that even the hottest stocks experience pullbacks, offering prime "buying the dip" opportunities. These chances, though rare, typically occur two or three times a year and may yield significant short-term gains if seized.
Here are three practical tips to help investors increase success rate and manage the risks of buying the dip.
Technical analysis: identify potential market dips
Timing is crucial; get in too early and you might get stuck, too late and the returns diminish. Two technical analysis methods might help:
I. Fibonacci Retracement
Previously, in the post What should you do when market takes a dive?, we discussed this method using NVIDIA as an example. We noted that according to Fibonacci Retracement, if NVIDIA's stock price "stabilizes around $102, it could be a buying opportunity."
As shown in the chart above, NVIDIA's stock indeed found support around $102 and began a strong rebound. On August 5th, during a market downturn, the stock once dipped to around $90, hitting the 50% retracement level.
Fibonacci Retracement seems to successfully identified two support levels during NVIDIA's pullback, highlighting potential buying opportunities.
While this tool doesn't always perfectly predict the bottom, it could provide investors with some level of guidance during market panics.
II. Parabolic SAR
The Parabolic SAR (Stop and Reverse) indicator is straightforward and visually intuitive, appearing as a series of dots above or below the price chart. When the dots move from above the price to below it, this may signal a shift from a downtrend to an uptrend.
Using $NVIDIA (NVDA.US)$ as an example, the Parabolic SAR indicator on August 12th suggested a trend reversal to the upside, which was followed by a sustained rise in the stock price. A similar signal was observed on April 26th. In hindsight, both signals indicated good buying opportunities.
Due to its lagging nature, the Parabolic SAR may not pinpoint the absolute bottom but could signal when the price is emerging from a bottoming phase, potentially helping investors to get on board at the right time.
It's important to remember that every indicator has its limitations and cannot guarantee accurate predictions. Relying solely on one technical indicator can be risky.
Pyramid trading strategy: buying stocks in tranches
When a stock is in a downtrend, predicting the exact bottom is extremely challenging. Instead of betting everything at one price point, buying in tranches could be a smarter approach.
Here's a method for buying in a downtrend: the Pyramid Strategy.
Note: The images shown are strictly for illustrative purposes and are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Here are some practical tips:
- Decide on the proportion for each tranche, gradually increase purchases as the price drops.
- Ensure that the intervals between buy points are significant enough to avoid exhausting funds too quickly.
- Consider setting a final and largest buy at a price below your worst-case scenario. This ensures you have capital left if the stock drops beyond your expectations.
If the stock rebounds before you've completed all your planned buys, that's still a win—you'll have a partial position that can profit, and remaining funds to deploy in future opportunities.
Cash secured put: acquiring stock at a lower price
Finally, let's explore a popular option strategy called the Cash Secured Put.
For example, suppose $NVIDIA (NVDA.US)$ is in a downtrend and currently trading at $105. An investor believes it will bottom out around $100 and wants to buy it at that price. He can sell a put option with a strike price of $100, assuming he can collect a premium of $1. Here are the possible outcomes:
Scenario 1: Stock Price Falls Below $100
In this case, the put option is in the money, and the buyer is likely to exercise it. The investor will be obliged to buy 1 share of NVIDIA at $100.
After accounting for the $1 premium he received, his effective purchase price is $99. Not only does he acquire the stock at his desired price, but he also reduces his cost basis.
Scenario 2: Stock Price Stays Above $100
Here, the put option is out of the money, and the buyer is unlikely to exercise it. The investor won't be obligated to buy NVIDIA shares, and he keep the $1 premium as profit, earning extra income without buying the stock.
Trading Options on moomoo: Markets > Options
Be careful
Buying the dip carries risks, as stock prices can be unpredictable, and anything can happen. Most of the time, it is nearly impossible to catch the exact bottom.
The major premise is that buying the dip should only be considered for stocks with strong fundamentals and a long-term growth trend. Without a solid foundation, no technical indicator or method can reliably guide you, and investors might end up stuck in a losing position.
Do you have any "secret method" for buying the dip? Share them in the comments below!
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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