It is a US and Canadian holiday on Monday, September 5. No stock trading.
US and Canadian stock indices are declining, and most of the Market Health Indicators have turned negative.
Be cautious with deploying capital on the long side. If there are quality trade setups I see, I will invest only a small amount of capital. In these conditions, I don’t want a lot of my capital exposed.
For traders looking for quick swing trades in stocks that tend to move a lot, I created a “Best Swing Trading Stocks List” which I’ll be updating monthly. It works well with the TATR (Trend ATR) strategy. I added a section on this to the Complete Method Stock Swing Trading Course this weekend.
Here’s a 5-minute summary video of the current state of the stock market.
How the Market Indexes Are Doing
I look at 4 different US indices 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. Here’s what each of the 4 indices represents:
- Nasdaq 100 – Tech stocks
- S&P 500 – Large US companies
- NYSE Composite – A wide array of stocks, varying in size and industry
- Russell 2000 – Smaller companies
2 Canadian stock indices are also included. The Composite tracks larger companies, while the Venture tracks very small companies.
Charts are provided by TradingView – the charts I personally use.
The indices are all experiencing pullbacks within a short-term uptrend.
I never assume to know what will happen. This pullback could turn into a big decline, or the price could chop around or move higher again.
But at the moment, the selling pressure is on. I am still scanning because the market can turn around quickly and I want to have my stock watchlist ready. But as mentioned, not deploying much capital on long trades due to this overall market weakness.
State of the Market Health Indicators
The following chart shows the market health indicators I track. They tell me the condition of the stock market overall, and whether it’s a good time to swing trade individual stocks.
The market health indicators are poor.
- 33% of S&P 500 stocks are above their 50-day moving average. 37% of all US stocks are above their 50-day moving average. It’s generally much easier to swing trade profitably (on the long side) when more stocks are above their 50-day average. When this indicator is below 50% it tends to be sideways or a downtrend for most stocks/indexes. Poor.
- Volume was relevant on June 24 when it increased with the 3% price rise to create a Follow Through Day (FTD). A big drop on high volume on Aug. 26 is what I call a Throw-up Day. This often signals a further short-term decline…which has unfolded.
- The dark 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. A more than 3% drop on August 26. Poor.
- The blue line is the cumulative NYSE Advance-Decline Line. It moved above its early April high before the S&P 500 moved above its April high. That is a bullish divergence and signals that the S&P 500 is likely to reach the April high before a new low. The indicator also stayed above April 9 levels, while the S&P 500 fell below its April 9 level. But recently the indicator has weakened. Decent.
- The blue columns are NYSE up volume divided by NYSE total volume. It tracks buying and selling enthusiasm. There were 91% upside days on July 19 and August 10. That’s bullish. But a 90% downside day on August 26 (manually calculated). That’s Bad.
- The old way of creating this indicator on TradingView no longer seems accurate. I created an indicator called UpVol/TVol NYSE Lowry Upside Days. You can view it here, or search “Lowry” under Indicator.
- The ultimate indicator is how many quality setups there are and how trades are working. The last couple of weeks there hasn’t been many stocks I am interested in, and even fewer stocks have triggered and gone anywhere. This is to be expected with most stocks dropping the last couple weeks. This week, my scan list was pretty small again. That’s not encouraging and naturally keeps capital deployment low…because there isn’t much to trade.
My entire method of swing trading stocks is covered in the Complete Method Stock Swing Trading Course. Now is a great time to review the material and prepare for the opportunities that are unfolding.
Sectors on the Move
Everything took a hit last week; every sector was down.
Energy is the only sector in the green over the last month.
There was a strong rotation into Utilities and Consumer Defensive stocks. These tend to fair a bit better in weak market environments (still drop, just not as much).
Over the last three months, Consumer Cyclicals, Industrials, Healthcare, and Technology are the top performing (non-defensive) sectors.
Sector performance provided by Finviz.
Scan as usual, or run a scan with the added criteria of only looking for stocks within certain sectors to reduce the number of stocks on your list and reduce your scan time.
What I’m Doing Right Now
I’m scanning and taking stock swing trades when I get setups. But as mentioned, limiting capital deployment based on the recent drop. I view the drop as healthy as it will create a lot more quality swing trades going forward.
By 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.