Buying The "Act Of God" Dip In Japan


The Nikkei ended down 6.2 per cent today, breaking a twelve-month rally in a big way.

The obvious but tricky trade here is to buy the dip.

Waverly Advisors justifies opening a new long position:

We initiated a long position in the June (CME) Nikkei 225 futures in Sunday’s overnight market (entry marked from 9,570) against a stop below 9,000…

Classically, equity markets tend to overreact to so-called “acts of God” with a startling regularity, but it is important to keep a few points in mind: though the hard trades are often the best trades (and, by extension, the absolutely terrifying trades are often the very best) be clear that this is a high-risk trade and not an allocation decision…

Notably this is only a short-term, technical investment:

From a trade management standpoint, we will be quick to take partial profits on any bounce. In making this trade, we are operating under the assumption that this selloff is overdone, but we would not expect this market to quickly regain all that lost ground. What we are playing for here is a bounce, pure and simple. Furthermore, a reluctant bounce would very likely be a pullback in preparation for another drop. This is a complex trade, and a difficult trade, but, win or lose, it is the right trade for the circumstances.

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