Overall, stock market health conditions are poor for taking swing trades on the long side. Since most of my swing trades are based on the daily chart, and the trades last 1-4 weeks, I don’t like taking these types of trades in poor conditions. I am in cash.
BUT, there is a possibility we could get a “follow-through day” during the upcoming week. IF that occurs, that would be the first signal to start nibbling at some long positions.
The trading system in the Complete Stock Swing Trading Course is designed so that we don’t really care if the market goes up or down. We make money in good times and stay out for the bad times (or possibly take some short trades if desired).
Let’s look at how the market is doing currently, and why I rate the conditions as “poor”(on a scale of bad/poor, ok, good, ideal).
How the Market Indexes Are Doing
I look at 4 different US 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.
I have also started including 2 Canadian stock indexes for those in Canada.
Charts are provided by TradingView – the charts I personally use.
All the major indices have recently made new swing lows. So at the moment, they are confirming each other. Things are weak. We know that.
But the S&P 500 and Nasdaq 100 could both potentially put in follow-through days this upcoming week. They almost did on Friday (Jan. 28) but volume was lower than the prior day. So now we are waiting till next week.
A follow-through day (FTD) is at minimum a 1.25% gain with higher volume than the prior day. It ideally occurs between day 4 and day 8 of an attempted rally. Friday was day 5. Sometimes the FTD occurs a little later. If it occurs any time next week, that would be acceptable in my book. Especially if we start to see the indexes actually advance out of the choppiness of the last several days.
If that happens, that is our first potential buy signal. I don’t trade the indexes, but it gives me the green light for buying individual stocks that align with the patterns I trade. I start out small, only allocating about 20% of my capital. If the market indicators improve (discussed below), then I start allocating more capital to more trades.
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.
All combined, these indicators are weak, indicating conditions are not ideal for initiating long swing trades.
- 35% of S&P 500 stocks are above their 50-day moving average. 23% 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. When this is below 50%, it tends to be sideways or downtrends for most stocks/indexes.
- Volume is not applicable currently, but has been escalating on the decline. Friday’s volume was lower than Thursdays, so no follow-through day despite the nice end-of-week rally.
- 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. Nothing of interest here currently.
- 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 have multiple days recently with big selloffs, followed by a big up day on Friday. Things are still volatile, typical of downtrends, or potential turning points. We shall see.
- The blue line is the cummulative NYSE Advance Decline Line. It is as weak as the S&P 500, so it is confirming the down move so far. Nothing interesting here, currently.
The indicators are not currently pointing to anything positive. No reason to be buying yet. This doesn’t mean the indexes or some stocks can’t/won’t bounce higher. They may. But I have no interest in trying to catch the bottom. If things start looking better, then I will start buying stocks again. Until then, I am holding off.
What Am I Doing Right Now
I am scanning for stocks to buy that I like the look of. I want to be ready in the event there is a follow-through day this week. There may not be, but IF there is, I will start picking up some trades. I will allocate more capital if the market health indicators improve.
If we don’t get a follow-through day, I won’t place any long swing trades. If we get a follow-through and the market health indicators don’t improve after, then I won’t allocate any more capital.
There are lots of opinions flying around out there. Don’t let them bias you. I ignore them.
Trust the price action. Trust the signals. Trust the stock patterns/strategies.
To learn more about scanning to find explosive trades, as well as everything else you need to know about swing trading, check out my Complete Method Stock Swing 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.