The Stock Market Health Indicators are in positive territory. This means I am willing to deploy capital to swing trades. I took several trades from last week’s stock watchlist. Assuming conditions stay decent, I’ll publish a new watchlist on Tuesday or Wednesday.

I am currently focusing on trading contraction breakouts. Some of these contraction breakouts are occurring from larger cup and handle patterns due to the recent price decline and then rally back toward the highs in the many stocks.

Before getting into the market health indicators, always remember:

There’s no greater market indicator than your own trades. They tell you exactly how YOUR strategy is performing in current market conditions.
Right now, definitely a mixed bag for swing trading stocks. Some working really well and also lots of failed moves up in the watchlist.

— Cory Mitchell, CMT (@corymitc) October 29, 2021

When things are going well, deploy capital. When things aren’t going as well, scale back.

While market conditions appear to pretty good right now on the surface, only 1/3 trades seem to be working. In really good conditions, 2/3 to 3/4 trades are working well. So we are far from ideal conditions. There is still profit potential out there, but until I start to see more follow-through on trades, I am keeping positions small and not deploying all my capital.

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.

Three are moving well, and one remains a laggard.

• All the indexes are in short-term uptrends.
  
  
• The NYSE, S&P 500, and Nadsaq 100 have recovered to their prior highs. The Russell 2000 has not.
  
  
• Small caps, the Russell 2000 index, remain the laggard group. This index has gone sideways since February.
  
  
• SUMMARY: Decent participation in the rally. Short-term uptrend within long-term uptrends in most of these indexes. Not perfect market conditions, but pretty good and worth taking selective swing trades in this environment.

State of the Market Health Indicators

The following chart shows the market health indicators I track. They tell me the condition of the stock market overall, and whether it is a good time to be swing trading individual stocks.

• 60% of S&P 500 stocks are above their 50-day moving average. 53% 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. These levels indicate tradable swing trading conditions..
  
  
• 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 an uptrend.
  
  
• The blue line is the cummulative NYSE Advance Decline Line. This indicator is right near its high as the S&P 500 is near its high. It’s neight strong nor weak. No warnings signs here.

How This Affects My Swing Trading

All this analysis is done on the daily charts, so I use it to determine whether I am going to take swing trades on the daily chart or not.

Since conditions are favorable, with no major warning signs right now, is am willing to deploy most of my capital if I see enough valid trades that trigger me into positions. But I am keeping some of my account in cash. If more trades start acting well, I will increase my capital exposure. If trades aren’t working well, I will reduce my capital exposure by reducing my position sizes on the next trades. No need to be aggressive when conditions aren’t ideal.

BY Cory Mitchell, CMT

Want to learn how to scan for and trade these patterns? Know which ones to trade and which ones to leave alone? Learn this strategy and others in the Complete Method Stock Swing Trading Course. 

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.