I got my haircut today and the hairdresser launched, without provocation, into the stocks I should be buying. He even wrote down a list for me when I left. He assured me I couldn’t go wrong.

There is saying that when your cab driver (or hairdresser) starts giving you stock tips on what to buy, it is time to sell! This is a general rule. Who knows, they could be a greater trader…but if they are, they are probably talking about “strategy,” not which stock will make you rich.

No sell or buy transactions will be going through today (or any day) unless they align with my strategies. But the old saying does have some merit. When everyone who could possibly buy—including people who can’t really afford it (my hairdresser was talking about a second mortgage or a home equity line of credit to fuel further purchases) or may not know what they are doing—is already in, that doesn’t leave anyone to keep buying.

Stocks can only go up if there are more people to keep buying it. It’s basically a legal pyramid scheme: get in early, or at least not last, and you may do ok. But if you are one of the last buyers, no one is coming in after you to give you your profit.

As I said, I am not selling anything unless my strategies tell me to.

As of right now, the S&P 500 looks strong. It has broken to new highs, following the Nasdaq 100 that did it almost three months ago.

Based on these charts it looks like everything is clear sailing, and for the most part it is. Except there are a couple of yellow flags I am seeing.

That said, I continue to valid long trades as they occur.

The Yellow Flags

A yellow flag is an area of concern. It isn’t a major problem, but in a healthy market, ideally, the problem should correct itself. If it doesn’t, it becomes a red flag. This is when there are major conflicting signals, trade opportunities dry up, or we start to see significant price selloffs in the indexes and the leading stocks. Stop loss orders tend to get hit more often when red flags occur or are in play.

The yellow flags are that the moves higher in the S&P 500 and Nasdaq aren’t being confirmed by other indexes such as the NYSE Composite (all stocks on NYSE) and the Russell 2000 (small cap stocks). When people are buying everything, it makes it easier to trade and make money. You can randomly buy stocks and potentially make money because people are buying everything. It shows there is an appetite for stocks, as a whole. When only select stocks and indexes are rising, it shows the appetite isn’t there. The market is being selective, and is potentially too extended.

It is not a red flag because these indexes are sitting in consolidations and could easily breakout to the upside. The NYSE Composite just pushed out of its today. The Russell 2000 may still do that as well.

79% of NYSE stocks remain in an uptrend, so that still favors being long and buying valid trade setups.

Daily 2% drops (1-day Rate of Change (ROC)) in the S&P 500 often bring about a further decline or at least a temporary flat period for the indexes. Not always, but often. We have not had any such days recently. When one occurs, I will typically hold off on taking new positions for a couple of days, and just scan for stocks that are holding up well.

Final Word on Swing Trading in This Environment

Not much has changed. We did have some big moves in lots of the stocks on recent watchlists. This has left only a few that haven’t broken out. The most recent watchlist from Aug. 26 is quite small.

The Cup and Handle strategy continues to produce excellent trades. I have a number that are on their way to their profit targets. Many of the stocks I am trading, and that are on the watchlists, busted out of cup and handles ages ago. If another handle forms (way above the cup, or there is no cup), I call that a continuation pattern, and it must have the same features as a handle in order to be tradable.

As a final note. When swing trading, always trade the correct position size for your account size, risk tolerance, and the trade setup.

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.