Stock Market Health Update For Swing Trading - Week Of Feb. 7

Last week the S&P 500 and the Nasdaq 100 both had a Follow-Through day. That is the first signal to potentially start taking some long swing trades. Overall, conditions remain poor, but there are pockets of the stock market that are performing well, so putting a portion (but not all) of capital to work seems to be a decent solution.

I rate market conditions on a scale of poor, okay, good, or ideal. As markets turn lower they progress from ideal down to poor. As the stock market starts moving up, it progresses from poor, to okay, to good, and then to ideal. Although, it is not always quite in that order.

Currently, we are still in poor conditions, but we could be transitioning to okay conditions, and potentially higher based on the Follow-Through day. Due to the uncertainty, I am keeping most of my account in cash, and only delegating a small amount to valid long swing trades, should they occur.

How the Market Indexes Are Doing

I look at 4 different US 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. I have also started including 2 Canadian stock indexes for those in Canada.

Charts are provided by TradingView – these are charts I personally use.

The US indices are in downtrends, recently making lower swing lows and lower swing highs. Small companies, which are tracked by the Russell 2000 and the TSX Venture in Canada, have been hit the hardest.

There has been a bounce recently, primarily in the Nasdaq 100, S&P 500, NYSE Composite, and the TSX Composite. That is of course positive, but the downtrends remain. An upside reversal hasn’t occurred and will not occur until we start seeing higher swing highs and higher swing lows.

A Follow-Through day is an early indication of a possible turn. It has occurred; but on its own, it’s prone to producing some false signals. When it occurs, I start allocating a bit of capital. To start allocating more, we also want the health indicators to improve. Right now, those market health indicators are still in poor shape.

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 is a good time to be swing trading individual stocks. All combined, these indicators are weak, indicating conditions are not ideal for initiating long swing trades.

• 40% of S&P 500 stocks are above their 50-day moving average. 30% 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. When this is below 50%, it tends to be sideways or downtrends for most stocks/indexes. We are below the 50% area, but it has been improving since late January.
• Volume is not currently applicable. On Day 6, there was a 1.25%+ gain, and volume was higher than on Day 5. That mattered for the Follow-Through day.
• The red bars are showing Up-volume divided by Total-volume on the NYSE exchange. Above 0.9 or below 0.1 are values I tend to watch for. There is nothing of interest here currently.
• 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. There was a big -2.44% drop on Feb. 3, which shows this is still downtrend behavior.
• The blue line is the cumulative NYSE Advance Decline Line. It is as weak as the S&P 500, so it is confirming the downtrend currently.

What Am I Doing Right Now

I am scanning for stocks to buy that I like the look of. I am willing to deploy some capital - approximately 20-25% of my account to swing trades. The rest stays in cash or is used for day trading.

I do enjoy day trading stocks during times like this because it’s possible to grab several percent in a matter of 10 or 20 minutes in stocks that are moving (and many are). Energy-related stocks tend to dominate my day trading watchlist, but I am willing to trade any stock with the potential to move significantly.