Accumulating During a Correction
My Strategy for Accumulating During a Correction/Distributive Period
This post is a brief note summarising my strategy for accumulating during a Correction/Distributive Period. This is based on my experience plus some back-testing.
I also recommend reading the following posts if you have not done so already. They alone are worth significantly more than any subscription you may already be paying for, yet they are free to read and easy to understand.
My simple approach for accumulating during a correction or a bearish period is as follows:
Buying Gap Downs: I look to buy on gap downs, especially following a period of sustained weakness.
For example, last Monday we gapped down after several consecutive “red days,” with the indices down ~3% in the pre-market. I saw that as a buying opportunity and was buying pre-market at prices that did not print in the cash session. We ended the session green and at the highs of the day; many of the dip buys were up 5–15%.
I also especially like to fade extremes when a move is accompanied by an extreme VIX, such as last Monday when the VIX was 40, the CPC was >1, and positioning was extremely one-sided. “Do more at extremes, less in the middle”
End-of-Day Execution: If the market opens up and then distributes, I prefer to buy in the final 10 to 15 minutes of the trading session.
In a distributive market, prices often open higher only to be sold down throughout the day; waiting for the close helps avoid “catching a falling knife” during the session.
Managing Strength: Don’t chase gap-ups. Instead, I prefer to use periods of strength to trim my positions.
For example, if we gap up in a weak tape then I am not likely to be a buyer; instead, I may do some marginal trimming to manage my cost basis and keep the account moving.
The above, in combination with the prior posts, are simple yet effective tools one can use to better manage one’s portfolio.
Thank you for reading and see you for the next one!