Short-Selling In ‘Buy The Dip’ Market


Simpler Trading Team

Mar 28th 2022  .  4 min read

Locating stocks with profit potential that are behaving bullish in a bear market full of chop has been difficult.

Certain sectors, such as healthcare and energy, are giving Simpler’s traders unique signals in a “buy the dip” environment.

(Check out the free video, above, for insight into trading this changing market.)

Short-selling into quarterly expiration

The market has quarterly options expiration on Thursday and there are a handful of trends that appear poised for continued movement to the upside. Healthcare, energy, and gold have continued leaning to the upside in this bear market.

Traders have been squeezing the shorts – which has nothing to do with how long they hold the trade. Short-selling is a strategy used by traders who expect a decline in stock price. Traders look to sell a borrowed stock at its current price, then repurchase the stock at a future time at a lower price.

The obvious risk of shorting a stock is that it could increase in value – such as bullish stocks in the energy and healthcare sectors. Traders should manage risk here, because there is no limit to the potential loss from a short position. Since this also involves a margin, the short seller could be subject to a margin call as the asset price increases.

Guard against pain of short-selling

Many traders will remember the short squeeze of GameStop last year when sellers were forced out of trade positions by a sharp increase in price. Short squeezes are generally triggered by unexpected good news (such as earnings reports) or a gradual increase in buying pressure that forces short sellers to cover their positions.

This also means that holders of puts are feeling the pain in this market. A put option gives its holder the right – but not the obligation – to sell shares at a predetermined strike price in hopes that the stock price will drop below that strike price. This would give the owner the ability to sell at a premium.

This week traders could see similar puts expire worthless (quarterly options expiration on Thursday) as the S&P 500 index trades sideways.

‘Buy the dip’ setups in choppy market

Stocks moving in a vertical direction – such as Apple for a week – make the choppy indices tough to read. Traders looking for a pullback in Apple can’t seem to find the right entry point.

In this environment, Simpler’s traders are keeping their focus on the charts for potential trades.

The focus in the Simpler Trading online chat rooms is on the best trends, setups, and entries possible. When buy signals align with momentum, a pullback can be an opportunity to jump back into a bullishly trending stock, i.e. “buy the dip.”

Energy stocks, while showing the daily stacked exponential moving average (EMA) and signals of an uptrend, are missing a solid entry point. Should a dip open up this week, the potential for a good entry is there for long trades moving bullish.

Energy stocks such as EOG Resources (EOG),  Devon Energy (DVN),  Marathon Petroleum (MPC), United States Natural Gas Fund (UNG) all have solid signals that have the potential for dip-buying opportunities.

Simpler’s traders are paying attention to the healthcare industry after this sector addressed recent structural issues. The sector is showing potential for buying the dip.

Key sectors, stocks to ‘dip into’

As the market continues to grapple with an ongoing European war and the wrap-up of the first quarter, traders at Simpler are monitoring the structure of the sectors to determine if there are solid entries for bullish stocks. The top five to 10 holdings in the sectors provide traders with stocks of interest for their watchlists.

Traders are highlighting consideration of these stocks when buying the dip. Traders will do well to remember that even when a stock is showing picture-perfect signals with a bullish trend, momentum, and structure intact – the entry point is the key element.

The question traders need to ask is, “What are these stocks dipping into?”

The art of buying the dip entails understanding the structural elements of the trade. Traders need to know what they are dipping into before buying a stock. Avoid buying long simply because price action moves lower.

As traders become more skilled and gain better understanding of the chart signals, opportunities for solid buying the dip entries can emerge.