I am no longer taking long trades currently and actually cut some positions back on Tuesday.
This is mainly due to quality setups lacking follow-through once they break out. Additionally, the major indexes are not confirming each other. The NYSE Composite and the Russell 2000 failed to make new highs while the S&P 500 and Nasdaq 100 did. The number of US stocks above their 50-day moving average has fallen well below my minimum 50% threshold (currently 43%).
I feel a bit like a see-saw recently. Deploying capital, and then stopping or cutting back. But the market is choppy and this kind of vigilance has allowed me to grab some winners while keeping losses in the account to a minimum when many stocks are just chopping up and down making little progress. I trade for a living, so I am not willing to be aggressive unless conditions are great. Capital is my lifeline. I don’t waste it.
Here’s how all the market health indicators are doing.
From top to bottom:
- The top indicator is how many stocks are above their 50-day moving average. I find that it is a lot easier to make money when most stocks are moving up and above their 50-day average. Currently only 47% of S&P 500 stocks are above their 50-day, and only 43% of all US stocks are above their 50-day. Both are trending lower. This is a key reason I am not going to buy anything right now until these move back above the 50% level. I don’t know when that will occur. Could be very soon, or not for a long time.
- Next is volume. Nothing interesting there.
- The red bars are upvolume divdided by total voume (per day). Nothing exciting here currently. If that indicator drops below 0.1 that is important. That means less than 10% of volume that day occurred in stocks moving higher. It is not super useful on its own, but is a warning sign when it happens. But currently, this indicator is neutral.
- The blue bars are how much the index moved each day in terms of percent. Single day drops of 2% or more are cause for concern. Not every 2% single-day drop causes a big downtrend, but every big downtrend has a 2% single-day drop near its start. This indicator is neautral and quite calm. Which is good to see in a bull market.
- The bottom indicator is NYSE advancing – declining stocks. It’s a running total and a good indication of underlying stregnth or weakness in the market. The S&P 500 is very close to highs, but the indicator is turning down the last few days. It is no longer confirming the advance. It is a minor decline, so I would put this indicator in neutral to slighly bearish territory currently.
- From a price action perspective, we have nice uptrends in the Nasdaq 100 and S&P 500. But the NYSE Composite and the Russell 2000—which are much bigger indexes and more indicitive of the typical stock—have been chopping sideways and unable to make upside headway since May (February for the Russell).
I don’t use these indicators in isolation. Altogether they paint a picture of market health. One indicator is bearish, three are neutral, and 1 is slightly bearish. That’s enough to put me on the sidelines until conditions improve a bit.
Because of that, I will save myself time and not scan this week. If conditions improve, then I will run my scan. But for now, I will sit back with the positions I do have and see how things unfold.
With trading, there is no reason to always be active. Wait for good times for your strategies. Right now is not an ideal time for my strategies, so I have no problem backing off and saving capital for the good times. If things do start looking better, I can always scan and look for opportunities to get into, and I currently do have some trades out to take advantage of upside if it occurs.
Cory Mitchell, CMT
The Complete Method Stock Swing Trading Course covers my swing trading approach in-depth. It also lays out exactly when to trade four different strategies (that suit different market conditions), and how and when to scale back when conditions aren’t ideal. Trading when conditions aren’t right will typically lead to giving back all the gains accumulated during the good/easy times.
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.