Based on the market health indicators I track, I’m taking it easy and will not be aggressively buying trade setups based on daily charts until conditions improve.

The market health indicators are in warning flag mode. Stay out, or only trade on a lower time frame if you have that skill set and short-term trading is in the trading plan (see video below).

When I am trading, these are the setups I watch for: trend channels, contraction breakouts, and double consolidations.

First, let’s look at the major indexes I track.

I look at 4 different 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. We don’t have that right now. This is one of the reasons I am keeping nearly all my swing trading funds in cash.

• The Nasdaq 100 and S&P 500 are both making lower swing lows and lower swing highs. That is the definition of a downtrend. It could reverse at any time, but it can only do so if it starts making higher swing highs and higher swing lows.
  
  
• The NYSE Composite is a list of all stocks on the NYSE exchange, so a wide array of stocks from different industries and different sizes. This index recently dropped to the bottom of a 5-month range, and is currently still below the Sept. 27 swing high. So no uptrend there either.
  
  
• The Russell 2000 index is filled with small-cap stocks. This index has been moving sideways for many months. It’s currently near the middle of the range and is below the Sept. 27 swing high. No uptrend their either.
  
  
• I DON’T PREDICT WHERE THE INDEXES WILL GO. No need for that. I simply assess the overall market health and determines whether I buy, short, or do nothing in individual stocks.

So really there is no reason to swing trade on the long side, based on daily charts, which is what this analysis is based on. Until I see higher swing highs, going long is just gambling that scenario will occur.

The market health indicators discussed below say pretty much the same thing: “Tread carefully.”

Next, let’s look at the Market Health Indicators I track (from top to bottom).

• 39.88% of S&P 500 stocks are above their 50-day moving average. 46% 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. These current readings are a warning signs.
  

• Volume, not important at this time.
  
  
• The red bars are showing Upvolume divided by Totalvolume on the NYSE exchange. No important values recently. Above 0.9 or below 0.1 are values I tend to watch for.
  
  
• 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 had a 2.04% drop on Sept. 28. The indicator has stabalized since.
  
  
• The blue line is the NYSE Advance Decline Line. It is actually showing something positive right now. While the S&P 500 and Nasdaq 100 made lower swing lows last week, this incicator make a higher swing low. It is not a buy signal, but it doesn’t incidate that that selling was not as wide spread as the Nasdaq and S&P 500 made it appear. But more recently, the indicator barely budged higher while the indexes went up. So the indicator isn’t confirming the move higher either.

How This Affects My Swing Trading

When there are warning signs like this, I severely restrict new trades based on the daily chart…because the daily charts in our analysis are exhibiting warning signs.

I will take some trades on lower time frames, but because the market isn’t healthy on the daily, I am only going to use a bit of capital, and I will still only trade in strong stocks.

Someone recently asked me if it is ok to trade stocks in a strong sector if the indexes are weak (telling us not to trade). For example, the energy sector is pretty hot right now, while everything else is weak. Sure, trade that sector, but the paragraph above applies. You may be able to find trades on the daily, but more likely it will need to be on a lower time frame. And only use a portion of your capital. Eventually, if conditions stay weak, everything gets sold.

Also, there are still some trades playing out, or hit a target or stop loss since the last swing trading watchlist in August:
MGRO: +14R (closed)
CELH: +5.5R (closed)
INVE: +0.75R (open)
NTLA: -1R (closed)
IKNX : +4R (closed)
FOM.V: -1R (closed)
CLDX: +1.3R (open…I didn’t take this one. Odd pattern.)
UONEK: -1R (closed … I didn’t take this one. Very spread out pattern. Didn’t like it)
ISEE: -1R (I didn’t take this one, but it is possible to have been triggered in. Again, bit of an odd pattern).

These all didn’t trigger at the same time, and some closed pretty quick, so in total…if I recall correctly…less than half of my capital was deployed at any given time.

Total profit since late August (more without those not-so-great patterns): +21.55%…during a time when the market turned shittty. Take out the big win from MGRO, and still could be up about 5-7% over the last month while the market was dropping. That’s why we keep the trades that we take. We are basically hedging our bets: if the market does well, we keep making money. If the market keeps dropping when conditions aren’t good, we won’t have much capital deployed and our losses are 1R to 3R maybe (1-3%) even if the market crashes.

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.