How Long Can 'Buy On The Dip' Strategy For SPY Stock Last?

Buying on the dip is a great strategy, until it isn’t. The problem is when a market move is over, the destruction can cause outsized drawdowns. It seems to be working on the S&P 500 now but how long can it last? For swing trading, here’s how we used a leveraged SPY stock position to help boost performance.


Swing Trading Strategy: Using Leveraged SPY Stock

An easy way to increase exposure is to use a market index exchange traded fund. For SwingTrader, we recently went with ProShares Ultra S&P 500 (SSO). It gives you twice the performance of SPY stock.

The S&P 500 tested its 50-day moving average line successfully multiple times since November 2020. When it pulled back to the line again in May (1), we were under 50% invested on SwingTrader. When the S&P 500 bounced off the line the next day (2), we added SSO stock.

The leverage gives us a little bit of extra performance vs. SPY stock and is especially useful as long as the trend remains in your favor. The Nasdaq composite, by contrast was still below its 50-day moving average line. It’s relative strength line also lagged since the middle of February.

An Easy Hold Despite The Dips

The SSO stock position was a longer hold because it never gave us much reason to sell. The beginning of June saw the S&P 500 test the 21-day moving average line but again we got a bounce (3).

Still, we used the subsequent jump as reason to shed a third of the position on strength a couple days later (4). At that point we had a lot more exposure. At nearly 100% invested, we didn’t need the extra exposure from SSO stock. Especially since it’s leveraged on SPY stock.

Another Buy On The Dip Chance

On June 21, the S&P 500 bounced again from its 50-day line (5). After seeking support at the 21-day line a few days before, the index closed below the 50-day line for just a day before bouncing strongly again.

The rally that unfolded was steeper and gave the S&P 500 and SPY stock a more extended look (6). Notably the Nasdaq composite was also looking stronger at this point, but also extended.

We shed a lot of our stock positions as the S&P 500 pulled back to its 21-day line (7) but kept the SSO stock. We were expecting more of a pullback as a lot of stocks were showing dramatic drops and sector rotation seemed to be on the rise. SSO stock allowed us to keep some exposure but without the single-stock risk.

The biggest problem with the bounce was it quickly seemed like the S&P 500 and Nasdaq composite moved to extended territory again (8). That led to our decision to go lighter on exposure and shed the remaining SSO stock position (9).

Where We’re At On SPY Stock Now

Our decision seemed prescient as things got uglier earlier this week (10). But again, the S&P 500 and SPY stock found support at its 50-day line. Not only that but many stocks showed upside reversals and so we started increasing exposure at the end of the day even though the market was still down.

As stocks followed through on the reversals, we tried to hit it harder. Though the S&P 500 looked strong, we didn’t buy the SSO stock back. Instead we went with the ProShares Ultra QQQ (QLD) to reflect the greater strength we saw in technology names.

Now as we start to get extended again, we are selling into the strength. Should stocks pullback again, we’ll have less exposure on the dip and a reduced drawdown. Plus the opportunity to buy on the dip again as we see strength come back. Our biggest risk is that continued strength could make us feel underinvested.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.


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Harry Byrne

Harry Byrne

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