Should You Buy Any ETFs On Dips Now? How About EWJ?

Dip Buying was alive and well at least in one area of the market. I guess it was simply too tempting for investors to see a big drop in Japanese stocks and not get involved via an ETF like EWJ.

Index Universe reports that EWJ drew in $650 million in assets last Tuesday despite the broad sell off. While the Nikkei managed to bounce back nicely on Wednesday by gaining 5.68%, investors in EWJ were not as fortunate as that ETF dropped another 3.74%.

Sure, we all like to buy a beaten down ETF at the bottom and ride it up to the top, but is this really the right time?

While during strong bull markets, buying on pullbacks can have its rewards, we are in a different situation nowadays. For one, the bull is pretty old and, with not many corrections in the recent past, we were way overdue for one.

Markets have been running up based on Fed stimulation via QE-2 and not via any support by a roaring economy that supports these recent lofty levels. And more importantly, there is always a point where a pullback or dip can turn into something worse, like a return to bear market territory.

In the case of sector or country ETFs, a break below their respective long term trend lines is an indication that we have turned the corner and have left bullish territory to visit with the bears for a while. That has happened with EWJ. Take a look at the one year chart above.

Its trend line has clearly been broken, which means to me that I would not touch this ETF until not only a break to upside occurs again, but that prices stay above the line for a few trading days. While this does not guarantee that EWJ will head north again, it’ll enhance the odds that the bullish trend has resumed.

With the current rebound, we may see a crossing of to the upside again, or this bounce may turn out to be a head fake. Global news in regards to the world’s hotspots is changing by the minute and can cause bouncy market behavior.

Don’t make emotional Buy/Sell decisions but focus on your trailing sell stops and trend line breaks.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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