I don’t like what happened this past week in terms of market health. I have a few positions out, and I will let those trades run their course, but I will not be adding new trades unless I see the stock market health improve.
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How the Market Indexes Are Doing
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.
Recently (far right of the charts), we have the S&P 500 and Nasdaq 100 moving well. But the NYSE composite and Russell 2000 are pointed down.
Summary: Participation in the rally is waning. Large-cap stocks are still holding up ok right now, but smaller companies are being sold off. With fewer companies participating in the rally, that means it will be harder to find winning trades on the long side. That is why I am backing off from swing trades currently.
Conditions aren’t horrible; I may still deploy a bit of capital on great setups (or stocks that don’t really move with the indexes), but when conditions aren’t great I favor cash over new positions.
State of the Market Health Indicators
The following chart shows the market health indicators I track. They also tell me the condition of the stock market overall, and whether it is a good time to be swing trading individual stocks.
- 61% of S&P 500 stocks are above their 50-day moving average. 50% 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. The 50% level we are currently see is the bare minimum I like to trade with, meaning trading conditions are mediocre right now.
- Volume is flat and not a major concern right now.
- 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. Values of -2 are a warning sign anytime they occur. All small figures recently, which is consistent with an uptrend.
- The blue line is the cummulative NYSE Advance Decline Line. This is my main concern at the moment. The AD line has absolutely plunged recently while the S&P 500 has stayed releatively flat the last week. Recall though, that the NYSE Composite and Russell 2000 sold off last week, so we are seeing that in the AD line. This condition is not ideal for swing trading on the long side.
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By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.