Stock Market Health Update For Swing Trading - Week Of Jan. 10

Overall, stock market health conditions are poor for taking swing trades on the long side. Since most of my swing trades are based on the daily chart, and the trades last one to four weeks, I don’t like taking these trades in poor conditions.

The trading system in my Complete Stock Swing Trading Course is designed so that we don’t really care if the market goes up or down. We make money in good times and we are out for the bad (or possibly shorting).

Let’s look at how the market is doing currently, and why I rate the conditions as “poor”(on a scale of: bad/poor, okay, good, ideal).

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 of these indexes are in uptrends. I have also started including 2 Canadian stock indexes for those in Canada.

The Nasdaq 100 is in a two-month range. The price is currently at the bottom of the range. The longer-term trend remains up at this time. We need to see the price start moving up again.

The S&P 500 is fairly strong. It has fallen off its highs, but it remains in an overall uptrend and recently made a new swing high. The NYSE Composite is hanging out near a recent swing high. Overall though, this index has been making big swings up and down, moving mostly sideways. The Russell 2000 has been flat for the last year and is currently heading lower toward the lows of that range.

Basically, we have one index that looks decent (the S&P 500), a couple that look okay if they can bounce (Nasdaq 100 and NYSE Composite), and one index which is not in good shape (Russell 2000). So if it is easiest to make money on the long side when all of them are moving favorably, current conditions will definitely make it tougher. Don’t force your luck.

The TSX Composite, which tracks the largest 60 companies in Canada, remains in an overall uptrend, but it is weaker than the S&P 500 and is currently in a longer-term and short-term pullback. The TSX Venture, which tracks Canadian small-cap stocks (more like micro-caps), is in an overall downtrend. Again, not ideal if you are trading Canadian stocks.

State of the Market Health Indicators

The following chart shows the market health indicators I track. They also 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 not looking great, with most of them indicating conditions are not ideal for initiating long swing trades.

• 63% of S&P 500 stocks are above their 50-day moving average. 41% 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. The S&P 500 indicator is doing very well, but when we look at all US stocks, this indicator isn’t looking great.
• Volume is not currently applicable.
• 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. Nothing of interest is 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. We hit -1.92 on Jan. 5. I want to see those declines level off before jumping into long positions.
• The blue line is the cummulative NYSE Advance Decline Line. While the S&P had moved above its November and December high points, this indicator did not. This is a bearish divergence, which means there is low participation in the rally. This is a warning sign until it corrects itself.

What am I Doing Right Now

I am not taking any swing trades that will take weeks or months to play out. Conditions are too uncertain to hold through. I am willing to make some “earnings play” trades. I discuss this approach in the Drift Trader article. But if any trades are taken in these conditions, I am using an aggressive stock loss and I am out at any sign of a reversal in the stock.

Whether going long or short, any trades I consider right now need to short-term in nature, maybe a day or two based on the current momentum.