Based on the market health indicators I track I will be scanning this week for potential daily chart swing trades. The market health indicators are right on the cusp of being ok. So I will be taking some trades, if I see setups I like, but I won’t be loading up.
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 reason I may take some trades, but I won’t be deploying all my capital right now.
- The Nasdaq 100 and S&P 500 were looking quite good, but turned lower at the start of September. The S&P 500 made a lower swing low in September, while the Nasdaq 100 is still at a higher low. Bit of a divergence there.
- 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 is struggling to break out of a multi-month sideways range. It too recently fell and made a lower swing low.
- The Russell 2000 index is filled with small-cap stocks. This index has been moving sideways for many months. It’s moving toward the top of the range but is still some distance from breakout levels. The September decline has so far made a higher swing low.
- 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.
We definitely have a mixed bag. The Nasdaq 100 is still looking pretty good. The Russell has been weak all year but made a higher low recently. The S&P 500 and NYSE composite had short-term trend violations.
The market health indicators discussed next say pretty much the same thing: “There are some good pockets for trades out there, but there is also a lot of shit. Tread, but tread carefully.”
Next, let’s look at the Market Health Indicators I track (from top to bottom).
- 48% of S&P 500 stocks are above their 50-day moving average. Only 47% 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. We are pretty much right near that mark. So not great, but not horrible.
- 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. This indicator is quiet, confirming the uptrend in the S&P 500. Values of -2 are a warning sign anytime they occur.
- The blue line is the NYSE Advance Decline Line. It should rise as the S&P 500 rises to confirm the trend. Since July, when the S&P 500 made a new high, this indicator didn’t. That is not good. It forewarned of some trouble of ahead. But now, the recent September low on the indicator was above the August low, even while the S&P 500 made a lower swing low. That could indicate the market is turning around. But what I would really love to see is the ADL make a new high before the S&P 500 does. When that occurs, nearly 100% of the time the S&P 500 follows suit and makes a new high. So I will be watching for that as well. If the indicator turns lower while the S&P 500 goes higher, that is not good.
How This Affects My Swing Trading
Basically, we have gotten back to the market health being close to ok, but not great.
I may take a few trades if I see some setups I like when I scan this week. But I won’t be deploying all my capital.
I still have some trades out from a few weeks back, and those trades are still trucking along. So if the market does well here, I get to participate (possibly with some newly added trades as well), but if the indexes turn lower, the losses will be minimal. And that is exactly how it should be when conditions aren’t ideal.
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.