Ugly week for the stock market. I’m on the sidelines and watching it unfold.
I’m not taking swing trades on the long side currently. Here’s why…
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.
Not much to say here. Everything is ugly.
The Nasdaq 100 just made new lows.
The Russell 2000 made new lows a few days ago.
The S&P 500 and NYSE Composite are right at lows.
On the Canadian side, the Venture made new lows, and the TSX Composite has moved back to near the Feb lows.
Moving in unison lower. Poor health across all the indices. Nowhere is particularly safe at the moment in the stock market. Even energy and precious metals stocks are down over the last month.
On that note, I was trading energy stocks and some precious metal stocks over the last few months even while the stock indices were weak. That’s because those stocks were still acting strong. And they may still act strong going forward. Yet sectors that rally in the face of major market declines usually do so for a limited time.
Oil stocks have rallied following stock market peaks before…and did so for several months before crashing down themselves. The further energy stocks diverge from the overall market, the less I want to buy them.
If the major indices continue lower, eventually very little is spared. On prior occasional when #oil stocks rallied after an S&P 500 topped, they lasted several months and then fell too.— Cory Mitchell, CMT (@corymitc) April 26, 2022
May be different this time, but when shit hits the fan, it sprays everything. pic.twitter.com/GPTQznkJIo
And if they start moving lower with the indices I don’t want to trade them either. If they start looking again, I’ll consider it then.
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.
Currently, all the indicators signal poor health which tells me to avoid buying stocks at the moment.
- 27% of S&P 500 stocks are above their 50-day moving average. 24% 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. There have been three 2% or greater drops since April 22. POOR.
- The blue line is the cumulative NYSE Advance-Decline Line. It is currently moving down with the S&P 500. 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. There are some setups out there, but most of them falling along with everything. NEUTRA to Poor.
What I’m Doing Right Now
I am not swing trading stocks on the long side.
If I see a short trade I may take it, but I mainly focus on long trades when conditions are right.
I am day trading the EURUSD. That’s about it. Lots of movement and potential, and it’s something I can trade every day at the same time. I’m all about efficiency at the moment and not having to do homework on what to trade (golf season has started, which takes up much of my time).
EURUSD Day Trading Course covers how to do that.
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.