The 7 Best Times To Buy Stocks For Short Term Trading

When it comes to short term trading of 2 to 5 days, the trader needs to know when is the best time to buy stocks. A trader needs to know what are the market conditions that needs to be present before he or she should initiate a short term position. The trading period of 2-5 days is perfect for those who want to build wealth but do not want to stare at the screen like a day trader. This short term trading time is also perfect for initiating larger monetary positions because there's only so many shares you can buy for day trading and the price movement is limited.

The Top Down Approach To Trading

Have you ever notice there are days when the market rises, the entire basket of stocks seem to rise together? One look at the screen and you see stocks going green. When the market is up by 1% some stocks go up by 2%, 3%, 5% or even 10% within those few days.

How do you capture that perfect time to long stocks?

Those who have been trading for sometime will know that the direction of the general market have a big influence to individual stocks. On a day where the Dow Jones Industrial Average and the S&P 500 goes up by 1%, 75% of all stocks will be in the green. This is the time to really buy stocks and hold them for 2-5 days.

The lesson here is this.

You must know what the major indexes are doing. By major index I mean the:

  • S&P 500 Index or SPY
  • Dow Jones Industrial Average or DIA
  • Nasdaq Composite Index or QQQ
7 best times to buy stocks for short term trading

The chart above shows QQQ with the areas where it was extremely conducive for a trader to initiate short term long trades. When the market goes up, many many stocks can be bought and they can often move much more than the major indexes.

The chart of MSFT shows how a trader could have taken advantage of a short term upwards move and traded MSFT to the long side for a few days. The nice rise in MSFT for 3 days actually coincided with the rise of QQQ which you can see in the first chart. The last circle where QQQ rose rapidly also help to push MSFT higher for those few days.

The Best Time To Buy Stocks For Short Term Trading

The two charts above gives us proof that the best time to buy stocks for short term trading is when the major indexes are at important support areas. Whenever the major indexes are exhibiting any special bullish chart patterns, those are also a great time to long stocks.

Therefore, a good trader will look at these areas in the SPY, DIA and QQQ to long stocks:

  • Major and minor price support areas
  • When they are at the 20 MA, 50 MA and 200 MA
  • Bullish candlestick patterns in the major indexes (ex bottoming tail)
  • Oversold indicators in the major indexes
  • Major indexes making bullish chart patterns (ex double bottom)
  • When VIX or VXN is at extremes
  • When the SPY, DIA and QQQ is above the 15 min 50 MA

Basically what this means is, if the major indexes are at an area where it is likely to reverse higher or breakout higher, then those are the areas where you should look to long stocks. There are perhaps many more bullish areas that I may not know or have left out but I think knowing the above are good enough to help us know when to press the buy button. Let us examine each one in a little more detail.

1. When The Indexes Are At Major And Minor Price Support Areas

All of us know that support areas are places where a possible reversal can happen. The concept of support and resistance is so important that you can do away with indicators and just focus on them alone and be able to make money in the market.

  • If a support area keeps the major indexes from dropping, some stocks will bounce up.
  • If the support area helps to lift the general indexes, some stocks will shoot up even more.

You must remember not to buy stocks if the general market is still in the process of correcting. If the support area in the index is still 200 points away, then you should consider keeping your hands away from the buy button.

To learn more about major and minor support, click on the link.

Let's say there is good support for the Dow at 21500. Currently the Dow is correcting and it is at 21600. You do not want to be a buyer of stocks at this moment. Wait for the Dow to correct to the 21500 area and then only consider pressing the buy button.

buy stocks when the market is at support

2. When Major Indexes Are At Their 20 MA, 50 MA and 200 MA

For the purposes of swing trading, I have found that the 20 MA, 50 MA and 200 MA areas are very reliable. They are important areas which the major indexes and stocks tend to bounce up off. For example, when the Dow Jones is in an uptrend and corrects to the 50 MA, it often bounces up for a few days. This creates a very good opportunity to long stocks for a few days.

rallies tend to happen at the 20 MA, 50 MA and 200 MA

3. Bullish Candlestick Patterns In The Index

There is tremendous value in Japanese Candlestick patterns. Which is why I have devoted an entire chapter in my Stock Market Course to explaining the various Japanese Candlestick Patterns. For some reason, these candle patterns are very good at telling us when an index or stock is about to reverse direction.

If you see some bullish reversal candlestick patterns happening in the main index, then you should start to consider to long stocks for swing trading.

candlestick patterns often hint of reversal in the indexes

I have annotated the chart of Nasdaq Composite above with 4 instances where bullish candlestick patterns appeared and gave traders a nice swing trade. The first one is a bullish piecing pattern at the rising 20 MA. This one produced a nice run up. The second one is the morning star candle pattern which happened near the 50 MA.

Next, is the doji which hinted of slowing downward momentum. The index only went up one day before consolidating after the appearance of the doji. But do remember that when the index goes up even for one day, there are some swing trading candidates that can go up for 2-5 days even if the index subsequently traded sideways for a few days after day 1 of the rally.

The last example is where the Nasdaq Composite formed a bullish engulfing pattern. This is a powerful signal because the index opened lower but went up and closed higher. The body of the candle covered the bodies of the previous few trading days.

4. When Indicators Are Oversold In Major Indexes

Although indicators are derivatives of price, they can be quite useful in spotting oversold conditions. An oversold reading when the market is trading sideways or in an uptrend can be great areas to start looking for swing trading long candidates. You can use any oscillator that you like. Learn it well and know when they get oversold.

I like to use the stochastics indicator so I will provide you with an example of it below.

major indexes can bounce up when stochastics are oversold

The chart of QQQ above with the Stochastics 14,3,3 shows the areas where the trader should start to find swing trading candidates to the long side. One thing to note is you do not need to have the stochastics below 20. As long as the stochastics is moving near oversold level and about to turn up, you should get ready to find trading setups.

5. Major Indexes Making Bullish Chart Patterns

Chart patterns work very well (in hindsight). But that should not stop a good trader profiting from chart patterns. Bullish chart patterns can often signal a bullish move in the index. In turn, that provides us with good swing trading opportunities. There are many many bullish chart patterns out there and the more you learn about them, the easier it is for you to spot them as they are forming.

chart patterns can often hint of rallies in the major indexes

The chart above shows SPY with some bullish chart patterns that I have annotated. The first example is a double bottom with a break downtrendline. These pattern combinations can be very powerful bullish signals. The second example is a breakdowntrendline at support. See how the market rose after the pattern appeared. Lots of stocks offered great swing trading opportunities when the pattern appeared.

The last example is also a break downtrendline but with a little variation. The index is forming a possible reverse head and shoulders. When the index was breaking the downtrendline, the index was also forming the right shoulder.

The appearance of these patterns can give traders a nice swing trading opportunity in stocks. But the trick to profit from these patterns is not to wait for them to be very visible to the whole public. When you sense that the pattern is forming and about to be very visible you should start to take action. That way you can be one step ahead of the public.

Sure, there will be times when the pattern may not materialize but being one step ahead will often give you very good risk reward trades that will grow your account in the long run. Furthermore, some trading candidates have already formed some nice bullish swing patterns when the chart pattern in the indexes is forming.

6. When VIX Or VXN Is At Extremes

One of the secrets of the professionals that most people do not know is that they use other people's fear to gauge the market. One of Warren Buffett's famous quote goes something like this "Be greedy when others are fearful, and be fearful when others are greedy". When emotions in the market goes to an extreme, it is always good to see if we can go the opposite direction.

Only 7% of market participants will correctly pick the turning points in the market. The other 93% are always wrong. Therefore, it makes sense to try and figure out when there is extreme fear in the other 93% of market participants.

When the VIX is high, its time to buy. When the VIX is low its time to go.

One of the ways we can determine extreme fear is to use the CBOE Volatility Index or VIX. You can also use the VXN, which is the volatility index for Nasdaq. The gauge is calculated using some formula that makes use of call options and put options. When investors are too nervous about the market, they tend to buy too much put options. When they are too optimistic they tend to buy to much call options.

When the call option and put option buying goes to an extreme, it usually indicates too much optimism or negativeness. One of the maxims of the VIX is this:

"When the VIX is high, its time to buy. When the VIX is low, its time to go".

If you look at the chart above, whenever the VIX goes to an extreme, it really is a great buying point. Traders who look at the VIX can often spot great swing trading opportunities to the long side.

7. When The SPY, DIA And QQQ Is Above The 15 Min 50 MA

This last buying area is a little secret that I share with my friends and fellow traders. I have found that it works really really well for the purpose of swing trading. At least it works for my trading strategies. I have written about it extensively in this article How To Avoid Huge Losses In Stocks And Maximize Profits Using One Simple Stock Market Trick.

Basically this method or system tells me this:

  • Only consider to swing trade stocks on the long side if the SPY, DIA and QQQ is above the 15 min 50 MA
  • Only consider to short stocks for swing trading if the SPY, DIA and QQQ is below the 15 min 50 MA.
A simple moving average method to keep the trader on the right side of the market

The chart above is the 15 min chart of SPY. One of the secrets about swing trading that I have notice is when the SPY is above its 15 min 50 MA, swing trades tend to work very well. When the SPY is below the 15 min 50 MA, swing trades to the long side do not work that well.

I have colored the area below the 15 min 50 MA red. That way it is easy for me to know when I should take swing trades and when I should stay away from taking swing trades.

Conclusion

These 7 secrets to the best time to buy stock for swing trades are very useful to filter out the correct time to make your money work for you. They are by no means conclusive. I suppose there are many useful areas to enter as well but I think if you pay attention to these 7 factors, you will find some of the best times to long stocks for swing trading.

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