Last week was an inflection point for the market. We had seen that strong run-up in stocks in the last half of March. Then the first half of April was selling, retracing a portion of that prior advance. Then last week we paused and tried to move up. It was the point where we got to see if the market had enough steam to continue advancing after the pullback….it didn’t.
Thursday and Friday were large drops, taking pretty much all stock with it, including many commodity stocks which had been holding up well.
Many stocks on my swing trading watchlist fell away from potential entry points, or were triggered and stopped out. A few were doing well, but they dropped as well.
Conditions have deteriorated, the market health indicators are back in poor shape, the stock indices are dropping, and recent trades didn’t make much money or lost.
That said, there are still lots of stocks holding within tradable patterns. I will continue to monitor last week’s stock watchlist (and update it), but I’m unlikely to deploy much capital this week. Even if there are some trade setups, my guess is it will take several days for them to recover back to possible entry points anyway.
Below are the health indicators I track, and how they are doing (not good). The information below is covered in the Complete Method Stock Swing Trading Course.
How the Market Indexes Are Doing
I look at 4 different US indices 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. Here is what each of the 4 indices represents:
- Nasdaq 100 – Tech stocks
- S&P 500 – Large US companies
- NYSE Composite – A wide array of stocks, varying in size and industry
- Russell 2000 – Smaller companies
I have also started including 2 Canadian stock indexes for those in Canada. The Composite tracks larger companies, while the Venture tracks very small companies.
Charts are provided by TradingView – the charts I personally use.
I was willing to buy last week because the indices were at an inflection point. Last week their prices paused after pulling back from a run higher. They attempted to move up, but then failed late in the week.
Short-term momentum is now down and the Nasdaq 100 and the Russell 2000 are quickly approaching the March lows. That makes it too scary to jump in and deploy a bunch of capital that this point.
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’s a good time to be swing trading individual stocks.
This week, all the indicators turned bearish/poor health.
- There was an upside follow-through day (FTD) on March 16. As a joke back in February I put “Throw Up Day,” which was the point where I believed the FTD was in danger of being invalidated. April 21 and 22 were “Throw Up Days” again. The sharp selling has counteracted the March FTD, and I now want to see new bullish signals before I start aggressively buying again. POOR.
- 42% 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’s generally much easier to swing trade profitably (on the long side) when more stocks are above their 50-day average. When this indicator is below 50%, it tends to be sideways or a downtrend for most stocks/indexes. We are below 50. POOR.
- Volume is not important at this exact moment.
- The dark 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. 2.77% drop on Friday. POOR.
- The blue line is the cumulative NYSE Advance-Decline Line. It is currently moving with the S&P 500 lower. POOR.
- The columns of blue ( I like blue, ok!) are NYSE up volume divided NYSE total volume. It is an indicator of buying and selling enthusiasm. Levels below 10% and above 90% are important (or back-to-back days above 80%). Nothing important here at the moment. The old way of creating this indicator on TradingView no longer seems accurate. I created an indicator called UpVol/TVol NYSE Lowry Upside Days. You can view it here, or search “Lowry” under Indicator.
- The ultimate indicator is how many quality setups there are and how trades are working. Over the last week, my account saw very little in the way of profits. Losses outnumbered winners, and trades from prior weeks that were working saw weakness the past couple of days. I went back to cash. NEUTRAL.
What I’m Doing Right Now
I am not going to make a new scan list this week. Rather, there are still lots of quality-looking setups on last week’s scan list, so I will just update that. I will X out stocks that are no longer valid, and update my notes in a different color so I can see how things have changed. As mentioned, I doubt many setups will be triggering this week anyway. Most need time to recover and move back up to the near the tops of their respective patterns.
Capital deployment is likely to be minimal this week.
The one tougher thing about swing trading, especially if mostly focusing on the long side (because the funds are in a tax-protected account, etc), is the lulls in action when conditions aren’t great.
Some people want to trade every day. For swing trading, that likely won’t happen, regardless of the method. Trading every day is generally relegated to Day Trading. If you’re more interested in that, I would check out the Best Day Trading Stocks page and then utilize a trend strategy.
Trading forex is also an option and has provided spectacular returns utilizing the price action approach covered in the EURUSD Day Trading Course.
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.