Buy on the dips to make your profits

TROUBLES in the Eurozone have caused a retrenchment in risk appetite over the past couple of weeks, and as a result, we have seen equity indices lose their upward momentum. At the start of last week the US Dow dipped below the 10,000 mark for the first time since early November, while the FTSE 100 is currently around 8 per cent off its January highs.

A gloomy outlook certainly doesn’t preclude a rising stock market – 2009 was more than evidence of that – but spread betters might be wondering if the only way from here is down. But, if you pick your market correctly, buying on the dips could pay off in the coming week or so.

For example, on Friday spread betters were using Thursday’s sharp sell-off to buy the FTSE 100. While this may have been little more than a relief rally, day traders can capitalise on similar short-term upward moves to score some profit. Simon Denham, managing director at Capital Spreads, says: “The recent correction in equity prices is offering up some cheaper stocks and bulls have been adding to their long positions.”

Spread betters can use both fundamental and technical analysis to find out which markets are worth picking up at cheaper prices. For example, mining stocks have come under pressure on the back of concerns about both the economic recovery and a stronger dollar, but individual firms with strong fundamentals should still do reasonably well.

Last week, miner BHP Billiton managed to beat expectations and raise its dividend but a weak outlook saw its share price fall. But the firm has $12bn worth of expansion projects underway and has also decided to hold back on a share buy back scheme so it is still in a good position, says CMC Markets’ James Hughes.

From a technical perspective, the stock bounced aggressively off the 23.6 per cent Fibonacci retracement from its November 2008 lows. Hughes says: “A move back to the January highs would be my target as the miners still remain in the ‘buy the dips’ category. In general I would still be bullish on this stock while we remain above the 200-day moving average.” If the market has strong support levels underpinning the price, then this is also a good sign that it may be worth buying on the dip. Just watch out for repeated tests of these levels as this could signal an impending break lower.

The recent sell-off in the market has been so pronounced that many markets have dipped below crucial moving averages and any bounce will have to break back through these key levels. Capital Spreads’ Simon Denham says: “These areas often give resistance and the next few days will see if the appetite for more exposure to equities is enough to drive us back up above these moving averages.”

With the increased volatility in the market, we are likely to see more of these dips on which you can pick up cheaper stocks.