Market timing is often defined as moving money in and out of the market or switching into other asset classes. But is can also mean timing your entry correctly. That is what I want to talk about here. But let’s be honest, as option swing traders (generally in the trade for 2 to 5 days), there is always the unknown of what the market may be the next session if holding the position overnight. That said, patience and the correct timing can still vastly improve your odds for success.
Is This the Best Time to Enter?
Although not all stocks are market stocks – meaning whatever happens to the market that day, the stock will tend to move closely with it – there are quite a few. I always like to have traders ask themselves this before entering any trade: Is this the best time to enter? What I mean is, is the market and/or the stock at a potential support and resistance level that might impede its progress in the intended direction? The reason is that support and resistance have a better chance to keep the underlying from moving through that level. Let’s take a quick look at a recent example we talked about in MTM’s Group Coaching class.
Market Heading South
In late May the market had been very volatile over several months, and it was predominantly moving lower. We were looking at a bearish potential opportunity in PayPal Holdings, Inc. (PYPL). What we noticed at the time on the hourly chart was a potential support level as seen below. The stock had either traded sideways or moved higher but was unable to break that level.
In turn, we took a look at what the overall market was doing at the time. Lo and behold, when we looked at the Invesco QQQ Trust (QQQ), it was sitting at potential support as well as seen below. Obviously, not every underlying will have its support and resistance levels line up accordingly, but when they do, it can be pretty powerful.
Moral of the Story
So, was it a good time to enter a bullish trade when you have the stock (PYPL) and the market (QQQ) at a support level that had better odds of keeping the stock from moving lower? The answer is clearly no, but as mentioned above, the next day could have brough a bearish open to the market and the stock. So, something you can consider as a technical trader is that if the level of support or resistance is not broken, thus giving you a directional opportunity, consider getting into the trade toward the close. Getting into a bearish trade with the market and underlying at support would most likely result in a losing position at the close that day.
As a swing trader or any trader who holds a position overnight, you are at the mercy of the market next session. But if there is a way to improve the odds and put them a little more on your side by timing your entry, it should be considered. Watching the stock chart and market chart are an easy way to do so.