The S&P 500 had a follow-through day (FTD) on Friday. That is one of the first signs of a possible turnaround. But we still need confirmation from the other market health indicators before I start aggressively buying.
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’s 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
2 Canadian stock indices are also included. The Composite tracks larger companies, while the Venture tracks very small companies.
Charts are provided by TradingView – the charts I personally use.
All the indices are in overall downtrends, but we can see the hard turn higher in the US indices over the last few days (not in the Candian indices). Unfortunately, a few up days doesn’t turn a trend…but it is a start.
The FTD is the first signal to potentially start taking some long trades in strong stocks that are forming quality setups. But capital deployment should be minimal at this stage. If the market health indicators (discussed below) improve, then I’m willing to deploy more capital to long trades.
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 swing trade individual stocks.
The market health indicators are trying to improve.
- 22% of S&P 500 stocks are above their 50-day moving average. 32% 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. Poor but improving.
- Volume increased on Friday, confirming the FTD which saw the index jump 3.06%.
- 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. June 9, 10, 13, and 16 were both greater than -2% drops. June 16 was the last big drop. Still seeing big overall moves though. Ultimately, we want those values (up and down) to get smaller to confirm the uptrend.
- The blue line is the cumulative NYSE Advance-Decline Line. It is currently showing a positive divergence as it held above its prior low (green line) while the S&P 500 has made a lower low over that time frame. That is bullish, but not enough to act on alone. I want to see that line trending higher.
- The blue columns are NYSE up volume divided by NYSE total volume. It tracks buying and selling enthusiasm. Levels below 10% and above 90% are important (or back-to-back days above 80%). 96% downside day on June 13 and 92% downside day on June 16. It’s flip-flopping since, so not providing much insight 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. I ran a quick scan and there are some decent-looking setups, and more that could develop over the next week or two. As mentioned though, it is very early in this rally. As the health indicators improve, I would expect to see more quality swing trade setups in individual stocks. So I will be watching for that.
My entire method of swing trading stocks is covered in the Complete Method Stock Swing Trading Course. Now is a great time to review the material and get ready for the next opportunities which are coming our way. Markets always turn around, and when they do, you want to be armed with ways to profit from it.
What I’m Doing Right Now
I will be keeping an eye on what stocks are setting up, but I probably won’t be deploying much capital this week. I want to see the health indicators improve some more.
That basically means another week with lots of golf.
I am day trading, always. Lots of movement and opportunity day trading stocks, but I primarily day trade the EURUSD every morning for 1-2 hours. Lots of potential there as well.
Take the time to refine your strategies while the market is weak. Don’t let the time go to waste.
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.