I have had a few stocks hit my stop losses recently, and a couple of others hit my target areas just before collapsing. The number of stocks that are forming nice setups is diminishing. I also noted in the Facebook Swing Trading Group that we were seeing a few more warning signs which I will discuss below.

I am severely limiting new purchases for the time being. I was looking for continuation contraction patterns, and will likely be looking for them again if market conditions turn more favorable again. The watchlists below are based on that strategy.

The Complete Method Stock Swing Trading Course covers this strategy more in-depth, as well as some others. It also lays out exactly when to trade each strategy, and when to take a step back.

Stock Market Health Check for Swing Trading

Last week the market appeared healthy, but it is looking less so now.

My main area of concern has to do with that top indicator on the chart below.

The number of stocks listed on US exchanges that are above their 50-day moving average is now slightly below 50%. That alone typically indicates swing trading conditions aren’t ideal.

We also have a large negative divergence on that indicator. It made a lower swing in mid-March while the S&P 500 made a new swing high in price. Fewer stocks were holding up while the S&P 500 (a select group of stocks) rose.

We can also see that indicator (orange) dropping below its early March swing low, while the S&P 500 is still above its early March swing low.

These types of divergences can signal 5%+ declines in the index, sometimes bigger. The S&P is currently down about 2.5% from its highs. But the indicator doesn’t necesserly indicate when a selloff will happen or what magnitude. And to me that doesn’t really matter. There is enough information for me to stop buying swing trades for the time being. From this point on, a 5% or a 20% drop doesn’t really change anything more me.

The other market health indicators are in ok health. If they start to deteriorate, like if we have a single day drop of 2% or more, then that would turn things more bearish.

Right now, I am just sitting back. Nothing to panic about yet, but with prices on the slide at the moment, there is no reason to be buying much. Keep capital exposure low on new swing trades.

If you are scanning, be on the lookout for patterns that look like contractions but that are bigger than the prior contractions in the uptrend of the stock you are considering (on a log chart). Big patterns tend to indicate a top, not an immediate continuation of the uptrend, which means they aren’t ideal for purchasing. I noticed a ton of these while scanning last week and this week.

In regards to the watchlists, I am publishing them so that I have a few stocks to keep an eye on if things improve, but won’t be taking many trades until I see that improvement.

US Swing Trading Watchlist

205 stocks on the scan list. About 53% drop from last week.

Raw list. I won’t be trading all of these. Filter for yourself based on reward:risk and quality of the setup when the time comes.

Contracting and Closer to Setup

GBOX – triggered and still near entry area.
SGRY

Still Needs to Move Up and Consolidate

BW – Coming out of a long-term downtrend.
CRTO

Canadian Swing Trading Watchlist

144 stocks on the scan list. About 25% less than last week.

Contracting and Closer to Setup

TSD.V
PKT.V – Odd pattern, very brief and small pullback.
AXE.V
QUIS.V

Still Needs to Move Up and Consolidate

CMMC.TO
CNC.V
HS.CN
ARS.V
GIII.V
JET.V
POU.TO – A little boxy (not triangular), but given strength, if it consolidates I would consider it.

By Cory Mitchell, CMT

Want to learn how to scan for and trade these patterns? Know which ones to trade and which ones to leave alone? Learn this strategy and others in the Complete Method Stock Swing Trading Course. 

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.