To The Moon

Should you Buy the Dips — Here is How I will Invest!

Source: Author’s creation

When I wrote a note on ADBE pre-earnings, it was trading 47% lower than its all-time high price. Imagine if I had bought ADBE on that day thinking it was available at a discount — it would be sitting on a loss as ADBE has fallen to 60% from its all-time high price.

Source: Author @ investing.com

As per the chart, from an all-time high price of $699, ADBE is trading at $275 — and that’s about a 60% fall in 215 trading days.

You might think: “Just tell me whether I should buy the stock now?”

I am not an expert, certified authority, or analyst who claims to predict or forecast things. But what I can share is my analysis before I invest my hard-earned money.

Different investors follow different approaches in the stock market to make money. Fundamental investing and technical investing are the only two types of such approaches. There are many more, like momentum, growth, dividend, low volatility, etc. With all these different types of investing or trading, one has to get hands-on experience and find a style that meets their requirements. Else it is better to stay a passive index investor. I am a trend investor, or you can call me a trend trader or what-so-ever. I combine a few fundamentals with technical analysis to spot a trend and ride with it. Trend investing suits me as I have limited time for analysis/tracking with a full-time job.

Should You Catch The Falling Knife?

Source: Google

Don’t catch a falling knife!

ADBE is a falling knife based on the present scenario and price points, and I do not know how far it can fall further. Many people follow the “Buy The Dips” strategy, which has a lot of limitations (Capital and position sizing, etc.)

In the past, I used to buy stocks / ETFs at every dip, say 5% or 10%. But there is always a limit on the total cash available on hand (I don’t use margins). I also cannot guesstimate how deep the stocks can fall. Lack of patience and emotions come into play when the stocks you hold will never go up, and everything else will.

So I changed my strategy from:

Buy at the Dips

to

Buy at the Strengths!

Buying at the strengths reduces the chances of human error (positions being sold due to lack of patience or FOMO, etc.)

I consider short-term and long-term moving averages (EMAs), along with short and long-term MACD, to confirm the trend reversals. Volume-average and daily traded volumes are also crucial to check market participation.

Source: Author’s creation

What does it mean when someone says — Don’t catch the falling Knife?

The term is commonly used in phrases like, “don’t try to catch a falling knife,” meaning, “wait for the price to bottom out before buying it.”

Back to ADBE:

Let’s explore what the charts are saying.

Source: Author @ investing.com

ADBE is trading below its 200-EMA, a key level below which many traders short the stock.

1. General Market (Index): Trending down
2. Stock: Trending down
3. Sentiment: Bearish & Fear
4. Earnings /Revenue Guidance: Caution

Why would you BUY a stock now when the odds are not in your favor?

Further, the FIGMA acquisition and cautionary note on future revenue/earnings guidance added more selling pressure on the stock.

So given all these odds out of favor, here is what I will do if at all I intend to buy ADBE.

1. First, I will never listen to any analyst estimates, news, or other brokerage calls
2. Next, I will focus only on the charts, subsequent earnings, and future developments in the company
3. Check for signs of institutional participation
4. Enter in tranches and take a position

As Mark Minvervini rightly said,

I’m not against buying and holding..

I’m against buying and holding losses.

Hold profitable stocks, sell stocks that are not.

No one ever got rich holding losses!

On the contrary, Value Investors may find value and continue to average down on the purchase price. Again, there is nothing wrong with it, as long as the people stick to one style and strategy. Most people buy thinking of a particular strategy and keep changing their strategy or get too much involved with news around the stocks, resulting in losses and getting defeated by their mindset.

Thus, it is essential that one has to stick to a strategy and investing style and refine them further as they gain market experience.

Stock Stage Analysis:

All Stocks go through four major stages, and they are:

1. Accumulation
2. Advance or Uptrend
3. Distribution, and
4. Decline

As a trend investor, I focus on stage 2 — uptrend. With the current scenario, please check the ADBE charts and let me know in the comments — what stage ADBE is in.

When Will I Buy ADBE:

Source: Author @ investing.com

1. Let the stock price ascend or cross above the 200-EMA
2. Check the volumes — the number of buyers will be more than the sellers
3. Large green candles shall indicate institutional participation well above the volume moving average
4. The short-term moving averages (20-EMA / 50-EMA) shall cross over the 200-EMA

All the above signals shall indicate trend reversal and potential uptrend.

Along with all the above, one may also consider:

1. Quarterly revenue growth
2. Quarterly EPS growth
3. Gross and Net Margin expansion

While the above is not the only criteria one has to look up to, with my trend trading style, the above summarizes most of it.

The above image shows that ADBE is ranked 972 out of 1000 stocks — meaning 971 stocks are better than ADBE as trading closes on Friday, 30th September.

Let’s see an example: In 2012, the stock price and the short-term moving averages went below the 200-EMA. Then the 20-EMA (green line) crossed up, followed by 50-EMA (Orange line) crossed up the 200-EMA (red line) — these are called the Golden Crosses (GC).

Check the volumes — larger and more predominant green candles indicate more buyers than sellers.

To keep the stock price moving up, the market sentiment, broader index, revenue/earnings strength, and sector strength have to be all lined up —ALL ODDS IN YOUR FAVOUR. Yet, there is a possibility one might still lose money, and that’s why traders have a stop-loss in place to protect the Capital.

When it comes to fundamentals or valuation, there are numerous ways to arrive at it. However, my preference is to follow trends than to boil my brains with fundamentals. Value investors keep buying the dips when they have cash and hold very few concentrated positions. In contrast, trend investors can generally have 10 to 15 positions or more based on the time required to manage every position. Note that the more positions, the more clutter; thus, more time is needed to manage those.

Let’s say you have an ‘Itchy Finger’ and are tempted to buy ADBE at the current market price; it would be wise to split the Capital into at least three parts (no mathematical rationale here) so that you take a position now using 1/3rd of the Capital allocated for the stock and then enter based on your strategy. If the stock falls further, deploy the next 1/3rd and thereon.

I hope the blog was helpful. Do share your thoughts and other ideas if you have any.

$Adobe(ADBE)$

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