Definitely not an environment I want to be taking long swing trades in. We have multiple warning signs within the market health indicators and we can see the stock indexes have fallen sharply.
I will not be initiating new swing trades until conditions improve.
While I may not be taking swing trades based on the daily charts, there are still some things you can do. I discuss that at the end of the article.
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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.
The NYSE Composite and Russell 2000 indexes have fallen all the way back to support levels that have been in place most of the year. Basically, gains from May onward have been erased (February onward for the Russell 2000). The S&P 500 and Nasdaq 100 are still in overall uptrends, but are currently in a pullback.
With no indexes moving up currently, that is going to make trading a lot tougher on the long side. Better to stay out.
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.
- 40% of S&P 500 stocks are above their 50-day moving average. 26%% 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; not ideal for buying.
- 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. The readin on Nov. 26 was 0.09. That means only 9% of total stock market volume occured in stocks that rose. 91% of volume occurred in stocks that dropped. So the last signal this indicator has given us is a bearish one.
- 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). [Remember, this is not a forecast, it is just mearusring current conditions].
- The blue line is the cummulative NYSE Advance Decline Line. The AD line has absolutely plunged recently, and it started plunging well before the S&P 500 dropped. This condition is not ideal for swing trading on the long side.
Conditions can turn quickly, at which point I would be willing to buy into individual swing trades on the long side. But for right now, I am content to keep my account in cash.
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What Can You Do While the Market is Falling?
When the market is falling I tend to focus more on finding longer-term trades and buying index funds in my “retirement/long-term account” as the indexes fall.
I don’t make predictions on how far prices will fall. I don’t really care.
I look at history and see how far the S&P 500 typically declines. Most declines are about 10%, so if the S&P 500 falls 10% I buy some in my retirement account. 20% declines don’t happen as often, but if the S&P 500 does fall 20%, then I buy more. Same at 30%, 40%. 50%. This is possible because I am adding funds to this retirement account each month.
The following chart shows all the times the S&P 500 has dropped more than 20% since 1960. The 1960s and 1970s were not good years for stocks, but buying on pullbacks did well. After that, the number of 20% declines is quite small, only 9 of them since 1980. Most of the declines were relatively short-lived, except for the 2000 and 2008 crashes which lasted more than a year before they started turning around. 50% crashes are extremely rare, even though most of us have witnessed these two 50% crashes in our lifetime.
ON TRADINGVIEW, THE INDICATOR USED ON THE CHART ABOVE IS A ZIG ZAG (with a deviation of 20%, meaning it is finding moves of 20% or greater from high to low).
That is not to say bigger crashes couldn’t happen, or that they couldn’t happen more often. But I have no problem buying on the drops as the long-term trajectory remains up.
I buy several indexes in my retirement account. I create a similar chart for them (like above) and decide when I am going to buy them…for example, on 15%, 30%, and 45% declines.
In addition to this, I am also monitoring the Buy the Dips Stock List. These are strong companies with steadily growing earnings, and if I can pick them up on the cheap, I will.
But individual stocks are different than buying an index. The S&P 500 index isn’t going to zero, but a stock could. I don’t want to just blindly buy when a stock has fallen 20%, for example. I will wait for some sort of reversal pattern.
I am ok with being a little late rather than too early! Wait for the turn higher! (see How to Spot Trends and Trade Reversals, and Reliable Stock Market Bottom Signals is also a good read/watch on this topic)
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.