Good Dip Bad Dip
Asian lady beetles look almost exactly like ladybugs. On closer inspection, the ladybug is rounder and smaller while the Asian lady beetle has a distinctive black ‘M’ on its head. The first species helps rid your garden of destructive pests and the latter species is a pest, invading your home for warmth and possibly lodging themselves into your pet’s mouth!
Dips in the market happen frequently across different timeframes. A good dip looks similar to a bad dip and we need to have some idea on how to tell the difference. Differentiating the good dips from the bad dips on a daily chart is made easier when seen against the general trend found on the weekly chart.
A price dip for one day doesn’t set off alarm bells. A series of dips over a few days is a little more concerning. It may trigger an exit from a trade, give you another chance to top up a position or alert you to a well timed entry into a stock you may have been stalking.
Provided the general market is not in the midst of a correction, buying into a strong trend where there is a temporary price weakness may be a good opportunity before a stock rallies again.
The GMMA is a good indicator of when a dip is more likely to be a temporary one or the start of something more permanent.
Recognising a Good Dip
Consider the following dips on the daily chart of Novonix - NVX.
The first dip on the NVX daily chart, Figure 1, shows a slight compression of the upper blue lines as price moves lower. To place this dip into context, I need to see it on a weekly chart. Opening the NVX weekly chart, we see the blue lines of the short-term GMMA are rising up and sitting above the long-term GMMA in the order of an uptrend. It looks like the beginning of another leg in the trend. The small dip on the daily chart is not considered a bad dip when seen in the context of the uptrend seen on the weekly chart.
The second dip on the NVX daily chart looks more concerning as the short-term GMMA turned downwards, compressed and fell into the red lines of the long-term GMMA before starting to rise again. On the weekly chart, there is a dip as well where price rejects the lower edge of the short-term GMMA, seen by the long red candle before rising up again. The uptrend remains intact on the weekly with the short-term GMMA above the long-term GMMA and the space between the 2 groups still indicating strength. Dip number 2 looks like a good place for an entry into the new leg of the uptrend emerging or to add to an existing position if this is your strategy.
The charts in Figure 3 shows the price action after dip number 2. On both the daily and the weekly, price continued to rise and the trend looked strong as the moving averages in both the short-term and the long-term GMMA groups remained widely separated.
Recognising a Bad Dip
Now let’s analyse the dips found on the daily chart of Tyro Payments - TYR.
On the right side of the daily chart of TYR, Figure 4, price had closed lower for 3 days in a row. The low of the last red candle rejects the lower edge of the short-term GMMA and pulls back up before closing the day a little higher than the low. Placing this area into the context of the weekly chart, we see the short-term GMMA is ballooning slightly as traders are active in TYR. The red lines of the long-term GMMA are narrowly separated as investors are also still interested. It’s not the strongest trend, as the months before showed sideways movement.
Price continued to move up from dip 1, Figure 5, before price dipped again. Dip number 2 was a major concern for holders of TYR as the short-term GMMA moved downwards and over the long-term GMMA. Looking again at the weekly chart, the blue lines of the short-term GMMA have moved sideways. It is not a good dip for entry into a new position nor to add to a current position.
Figure 6 shows the price action after dip number 2. On the daily chart, price makes one more dip before rising then falling steeply. This confirms dip number 2 as a bad dip. The movements are similar on both the daily and the weekly charts where price moved downwards with the short-term GMMA falling under the long-term GMMA. A downtrend is in place and is well supported on the daily where the moving averages show widely separated lines in the short-term and the long term GMMA groups. The wide space between the groups indicated strength in the downtrend.
Applying the GMMA indicator on both the daily and the weekly charts helps place a daily dip into context. Of course, the GMMA is not a guarantee of future price movements nor is it a stand-alone indicator. By analysing the overall trend of a stock correctly on the weekly, using the GMMA or other indicators, we are able to differentiate the good dips from the bad dips.