Based on the market health indicators I track I’m NOT deploying new capital right now. There are a few warnings signs in the Market Health Indicators.
I do have some trades out from late August/early September when conditions were better.
But, a couple of those warnings signs could be alleviated quickly, and that would be bullish and induce me back into taking more long trades. If the Health Indicators stay weak, I’ll keep my capital.
First, let’s look at the major indexes I track.
I look at 4 different indexes because they each tell a different story about overall stock market health. The stock market is healthiest, and swing trading stocks on the long side is most profitable, when all these indexes are in uptrends. We don’t have that right now.
That said, all the indexes have recently pulled back. IF we get a bounce here (our indicators, discussed below, will turn favorable), that could set up some trades: trend channels and double consolidations and contraction breakouts.
- The Nasdaq 100 and S&P 500 were looking quite good, but turned lower at the start of September. They have leveled off currently. These indexes are composed of large companies.
- The NYSE Composite is a list of all stocks on the NYSE exchange, so a wide array of stocks from different industries and different sizes. This index is struggling to break out of a multi-month sideways range. It too recently fell but has leveled off.
- The Russell 2000 index is filled with small-cap stocks. This index has been moving sideways for many months. It’s moving toward the top of the range but is still some distance from breakout levels. It is falling, but also leveled off the last three days.
- I DON’T PREDICT WHERE THE INDEXES WILL GO. No need for that. I simply assess the overall market health and determines whether I buy, short, or do nothing in individual stocks.
With the Russell 2000 and NYSE Composite lagging, it means a wide segment of the stock population is flat and not moving higher aggressively. That said, none are really dropping hard either.
IF the indexes can start rising in unison from current levels, we will likely see lots of viable trading opportunities.
If the indexes keep dropping, I will be staying out.
If the indexes stay flat, that means the Health Indicators will also remain in warning territory, I will stay out.
Next, let’s look at the Market Health Indicators I track (from top to bottom).
- 52% of S&P 500 stocks are above their 50-day moving average. Only 43% of all US stocks are above their 50-day moving average. It is generally much easier to swing trade profitably (on the long side) when more stocks are above their 50-day average. Current readings are a warning sign.
- Volume, not important at this time.
- The red bars are showing Upvolume divided by Totalvolume on the NYSE exchange. No important values recently. Above 0.9 or below 0.1 are values I tend to watch for.
- The blue bars are the daily percentage movement of the S&P 500. Big moves are associated with downtrends and turning points. Small values are associated with an uptrend. This indicator is quiet, confirming the uptrend in the S&P 500. Values of -2 are a warning sign anytime they occur.
- The blue line is the NYSE Advance Decline Line. It should rise as the S&P 500 rises to confirm the trend. Right now it is not doing that. When the S&P 500 made a new high at the start of September, the NYSE ADL remained below its high. That’s a warning sign. But, IF the NYSE ADL makes a new high (it is approaching) before the S&P 500 does, that is a high probabilitiy signal that the S&P 500 will also proceed to a new high.
How This Affects My Swing Trading
I am still opting not to deploy capital on daily chart swing trades (long or short).
We can see from the charts and market health indicators above that the market health is mixed.
Lots of stocks are flat, which means the odds of picking winners is smaller than if all indexes are moving up.
Two of the market health indicators are in warning territory (ADL and % above 50-day), but these could turn favorable quite quickly. So I’m ready to pounce on new opportunities should those turn favorable.
I don’t waste money when conditions aren’t ideal. There is more than enough to be made during the good times. And it is easy to lose that money in choppy conditions or a market selloff (when there are warning signs).
If you are antsy to trade, drop to a lower time frame. I also day trade the EURUSD, for example.
Cory Mitchell, CMT
The Complete Method Stock Swing Trading Course covers my swing trading approach in-depth. It also lays out exactly when to trade four different strategies (that suit different market conditions), and how and when to scale back when conditions aren’t ideal. Trading when conditions aren’t right will typically lead to giving back all the gains accumulated during the good/easy times.