Market health indicators remain mixed, which means I am not taking swing trades on the long side until conditions improve.

Last week I discussed how you can use periods of “not-ideal” market conditions to hone in your long-term trades.

This week (below), I provide some ideas on how to hone in on very short-term trades when conditions aren’t ideal.

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.

The Nasdaq and S&P 500 look ok, as they have bounced back and are consolidating just below their highs. The NYSE Composite is a bit weaker, and Russell 2000 is very weak.

This means the large-cap names are doing ok, but smaller-cap stocks, on average, are doing much worse. That limits trade potential and indicates market health isn’t very good at the moment.

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.

• The S&P 500 looks really nice to me. It very well could resume to the upside. The problem is that the rally is largely driven by a handful of really big stocks. The market health indicators and other indexes show many stocks aren’t doing as well as the S&P 500 portrays.
  

• 59% of S&P 500 stocks are above their 50-day moving average. 33% 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 current low level means lots of stocks are in short-term downtrends currently; although large-cap stocks are fairly ok.
  
  
• Volume is elevated on the selling.
  
  
• The red bars are showing Upvolume divided by Totalvolume on the NYSE exchange. Above 0.9 or below 0.1 are values I tend to watch for. Dec. 6 and 7 produced consecutive 80%+ upside days. That is often a bullish sign after a decline, but I am usually only looking after a bigger decline and prolonged selling. This drop in the S&P 500 was only 5%, which is very minor. Either way, buyers came in strong, so that is a positive.
  
  
• 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. We had a 2.2% drop on Nov. 26. That warns of increased volatility (which has continued), typically associated with downtrends or whip-saw periods as opposed to uptrends (small numbers). We remain in a elvated volatility environment currently, althouth the selling pressure has eased in the S&P 500, but not the Russell 2000.
  
  
• The blue line is the cummulative NYSE Advance Decline Line. The drop in this lines warns of low participation in the rally that the S&P 500 is showing. In other words, some stocks are risking while most are falling. Not ideal for swing trading on the long side aggressively.

Conditions can turn quickly. If the indexes show more strength to the upside, I will be buying into stocks on the long side. But for right now, I am limiting the swing trades.

The Complete Method Stock Swing Trading Course is currently 20% off during the Black Friday sale. It covers how to assess market health so that we are trading at ideal times, and saving our capital when conditions aren’t ideal. It also reveals several swing trading strategies.

What Am I Doing Right Now

I am not taking swing trades that are likely to last a couple of weeks or more, as discussed above. The market conditions just aren’t very good for that.

But, I do take short-term trades that last a few days or less.

• I am taking some trades after they post better-than-expected earnings or revenue. Essentially, if the risk is small, I consider taking the trade. I enter as the price moves above the high of the previous daily candle with a stop loss below the low of the previous candle. If the risk is small relative to surrounding (and likely) price moves, I consider the trade. I exit with an aggressive trailing stop loss. The candle I use as my entry trigger doesn’t have to be the candle prior to earnings. It can be any candle that provides an attractively small stop loss, even if it occurs several days after earnings (assuming the stock price hasn’t turned bearish). I have only recently started trading after earnings. Still fine-tuning my approach.
  
  
• I will trade a similar pattern in stocks that are spiking higher. I wait for a pullback, and then wait for a small daily candle to form. The pullback should be leveling off near the bottom of the recent pullback. I buy as the price breaks above the high of the small candle and a stop loss goes below. To keep these trades short-term, I am typically exiting near the close the day after entry. Could also use the aggressive trailing stop loss.
  
  
• And I also day trade forex. There are also article on day trading stocks if you are more interested in that.

Doing these types of trades isn’t required. The standard approach to swing trading covered in the Complete Method Stock Swing Trading Course does just fine on its own. But if you find you are compelled to take swing trades, even when conditions aren’t good, then maybe adding in a shorter-term strategy (day trading, or trades that last a few days or less) may help focus that energy into something more productive. Just an option.

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.