Watch Out For Apple, Consider ‘Selling The Rip’

In this article:

• “Selling the rip” replaces “buy the dip”
• Watch the simple moving average signals
• Apple may be a downtrend lynchpin

Market action today was another example of staying nimble as a trader because rallies and rips can be quick and brutal.

Those still trying to “buy the dip” are seeing even lower price action and those “selling the rip” are targeting a stronger position.

This market is not good and it’s not bad, but it is certainly bearish. And bears know how to take advantage of market sentiment still hoping for that next sustained rally higher.

Selling the rip is the play to watch

For so long traders have enjoyed a trending market that always pushed higher despite setbacks.

The market today is a different bear (pun intended) altogether. Until there is a sustained shift, traders need to step back from the idea that the market has to be in an uptrend to be profitable.

Traders who want to identify winning trades and target profit potential are embracing the path of least resistance given up by this downtrending market.

The “edge” for traders in this market is accepting that this market is bearish and could unravel further to the downside.

Uptrends tend to start off somewhat vanilla and then measure higher at an expected rise. Downtrends can fall quickly and not slow down until a true bottom hits hard.

While others are searching for bargain buys, Simpler’s traders are eyeing contrasting moves.

What is ‘selling the rip?’

What are traders looking for when “selling the rip” vs. “buying the dip?”

Buying the dip is a common strategy in an uptrending market (like for many years prior to the pandemic). In a bullish market, traders wait for the market to pull back and then look to buy into the following upswing.

Directional traders became accustomed to this price action because the market was bullish for so long.

In this bearish market, traders selling the rip watch for a rally higher, such as an oversold bounce, and they sell into this move. An oversold bounce can catch traders off guard who are expecting a longer duration rally that quickly shifts downward.

While this may be casually described as a “rip your face off” rally, bearish traders can take advantage of these moves by selling the rip higher.

Trading in this environment can be tricky, so traders need to understand market signals.

Follow the simple moving averages

Whether buying the dip or selling the rip, both strategies target a pullback in the market that signals a shift.

Start by watching the simple moving averages (SMA) – 5, 8, and 13 – on trading charts.

These averages help show how price action is moving over a selected period of time, i.e. 5 SMA or 5 bars on a chart. Watching the SMA can signal a shift, or strength, in bullish or bearish momentum.

Add in the 34 SMA, and the combination of these markers helps reveal a more nuanced picture of a market trend. Simpler’s traders are seeing this trend strengthening to the downside.

As these chart signals solidify, the market appears to be signaling this bearish trend could set up for weeks. The expectation is that this is one of those periods of time where the trend could remain pretty stable. 

Any movement higher against this trend is a signal to watch for opportunities to sell the rip.

Take a look at the market on Tuesday when the chop leaned higher throughout the day. Wednesday continued the chop with limited movement higher into midday, then the market pulled back sharply and closed down across all three major indexes.

How many traders suffered from this “rip your face off” rally?

This market environment is screaming for traders to adjust their strategies to fit the shift from bullish to bearish.

This market is not the environment for trying to pick bottoms, and then attempting risky buys.

Remember, structure dictates strategy.

Indexes, sectors offer possibilities

Recent sessions have shown the market to gap down and then return to chop. Where do traders look for opportunities in a bearish market that maintains chop while sinking?

One consideration is taking a look at indexes and sectors.

The S&P 500, NASDAQ, healthcare, energy, and most currencies are showing trends right now. There is a lot to like despite volatility carrying over from last month. The dust has settled and presents an opportunity to set up the next round of trend-following trades.

Consider the S&P 500 and its relative strength in this environment. This key index has been hit hard in the last five sessions with significant gaps down (much like the Dow and Nasdaq).

Key funds associated with the S&P 500 – XLK, XLF, XLV – are showing “double red” indicators as the market moves lower.

Simpler’s traders could argue that the only sector keeping the S&P 500 from a far more rapid move to the downside is the healthcare sector. Healthcare at this point appears neutral amidst recent market losses.

Strain on the S&P 500 is making it difficult for the index to maintain chop much less move to the upside. Expectations are that if healthcare bleeds from neutral to negative, the S&P 500 is on a steady trajectory to the downside.

Positive in the negative downtrend

Simpler’s traders will agree, trading a downtrend is not easy and the overall market environment can be more volatile than a bullish trend.

Traders who are averse to this market may not want to sell the rip – a risky setup. What traders can do is watch the market movement and learn from what it is revealing. Newer traders may never have seen this type of movement and experienced traders may never have traded in a downtrend.

Learn from what the market is showing.

Understanding the connection between the indexes and the sectors (S&P 500 and healthcare, for example) helps develop opportunities within these market areas.

Sell the rip is a viable trading strategy in a bearish market (be aware of the risk involved).

Now that traders are acknowledging the market shift, the goal is to find workable trades.

The Volatility Index (VIX) or “fear index” has garnered attention lately. This index anticipates market volatility over the next 30 days. The VIX has been high, peaking above 33 in trading today (above 20 is considered high volatility – more fear in the market).

The VIX isn’t necessarily a directional tool. It can indicate an overbought resistance zone that can lead to sell the rip possibilities when traders buy into a short-term rally.

Also consider futures and currency plays in this downtrend.

Beans, corn, gasoline, natural gas, and many currencies (such as EURO, Japanese Yen, British Pound, and Aussie and Canadian dollars) are showing trends in this environment.

These are ripe for sell the rip, and are possibilities to keep on the radar going forward.

As Simpler’s traders mentioned in a previous article, Apple is the stock to watch and might be the downtrend lynchpin.

Apple is a heavily-valued stock in all major indexes, and traders expect that if Apple falls from grace that will send the market spiraling overall.

The technology favorite has been below the 200 exponential moving average and any further loss could be the final piece to eliminate any doubt of a bearish market.

Simpler’s traders will continue to focus on the downtrend and what trades may develop.