Based on the market health indicators I track I am NOT deploying new capital right now, and there will be no scan list this week. I do have some trades out from the last week or so when conditions turned favorable briefly. There were warnings signs last week, which is why I only allocated part of my capital to trades; there are now more warnings signs.
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 market health. The 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.
- The Nasdaq 100 and S&P 500 look great and are in strong uptrends. 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 recently tried and failed. Not a huge warning sign, but not ideal either.
- 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 has started falling again over the last 2 days. That’s not good.
- The S&P 500 is in a strong uptrend. Stalled out at the moment, but no immediate problems with it.
With the Russell 2000 lagging, it means a wide segment of the stock population is flat and not moving higher aggressively. The NYSE composite is also lagging. This means the market isn’t as healthy as it could be.
Next, let’s look at the Market Health Indicators I track (from top to bottom).
- 58% of S&P 500 stocks are above their 50-day moving average. Only 47% of all US stocks are above their 50-day moving average. This also shows the disconnect that we see in the index charts above—some types of stocks are peforming well, while others are not. It is generally much easier to swing trade profitably (on the long side) the more stocks are above their 50-day average. Current reading is 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. While the S&P 500 has moved well above its July high, the NYSE ADL remains below its. This could be resolved if the NYSE ADL keeps moving higher, but right now it is warning sign.
How This Affects My Swing Trading
The most dangerous market condition is NOT a big drop…at least for most people with a half-decent trading strategy. Because if a drop happens you get stopped out of your trades for small losses and then you probably won’t get any buy signals while stocks are plunging.
THIS, right now, is the most dangerous market condition. Because you will probably get lots of trade signals if you aren’t monitoring overall market conditions, but many of those trades won’t go anywhere. A few may, but most will just chop sideways like the indexes are doing right now. It’s death by a hundred cuts.
Learn how to monitor market conditions like this, so you can make big money when conditions are good, and save your time, money, and mental energy when conditions aren’t right.
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.