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Cathie Wood’s ARK Innovation: Keep A Finger On The Buy Button

ARK Innovation ETF is starting to show signs of life, after quickly pulling away from the recent 52-week low of March 14. Is now the time to buy shares?

Growth investing has been in the gutter since early last year. Take famed investor Cathie Wood’s ARK Innovation ETF  (ARKK) - Get ARK Innovation ETF Report, for example. The fund has dipped as much as 66% from the February 2021 peak, but has started to recover lately.

Despite ARKK being off its 52-week lows, I think that the ETF is still very deeply discounted. If it rebounds strongly, most of the gains are probably still ahead, not in the past.

That said, is now a good time to buy shares of ARK’s flagship fund? I revisit my moving average strategy below to explain that bargain hunters may want to keep their fingers on the buy button.

Figure 1: Cathie Wood’s ARK Innovation: Keep A Finger On The Buy Button

Figure 1: Cathie Wood’s ARK Innovation: Keep A Finger On The Buy Button

(Read more from Wall Street Memes: This Under-The-Radar EV Maker Skyrocketed In March - And There’s More To Come)

ARKK: the discipline to limit losses

My strategy for buying ARKK on the dip may sound controversial or even counterintuitive to many. In a nutshell, I believe that investors should wait to buy shares at a higher price.

Buy high? What kind of investment strategy is this? Shouldn’t investors buy low instead?

Here’s the problem: ARKK has clearly gone through a boom-and-bust bubble cycle. The ETF climbed a whopping 310% between the bottom of the COVID-19 break market and the early 2021 peak. Then, the fund fell off a cliff and returned to pre-pandemic levels.

Bubbles are dangerous because they can push share prices lower, even after a sizable dip. This is what happened to the Nasdaq: after correcting 52% through the end of 2000, the index sank another 64% before finally bottoming in September 2002.

For the sake of limiting losses, I think that investors should use a moving average strategy to ensure that they are not buying into another leg lower in a bubble event like ARKK.

Where does ARKK stand?

Back to the trading strategy: I believe that investors are better off waiting for ARKK share price to peek ahead of its 50-day moving average before buying. If the ETF then dips back below the moving average, sell shares and wait for the next buy signal.

Following this approach ensures that investors are buying into the bullish trend. For example, it would have allowed investors to capture the 2020 rally while preventing them from riding most of the 2021 decline.

Today, as the chart below depicts, ARKK is trading only a few dollars below the 50-day moving average of $70/share. Should the ETF have another couple of very strong days, I will feel more comfortable that the bulls are finally ready to jump in and bid the share price higher.

Figure 2: ARKK: share price vs. 50-day moving average.

Figure 2: ARKK: share price vs. 50-day moving average.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)