Stock Market Health Update For Swing Trading - Week Of Jan. 31

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 types of trades in poor conditions. I am in cash.

But, there is a possibility we could get a “follow-through day” during the upcoming week. If that occurs, that would be the first signal to start nibbling at some long positions. 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 these indexes are in uptrends.

I have also started including 2 Canadian stock indexes for those in Canada.

All the major indices have recently made new swing lows. So at the moment, they are confirming each other. Things are weak. We know that. But the S&P 500 and Nasdaq 100 could both potentially put in follow-through days this upcoming week. They almost did on Friday, Jan. 28, but volume was lower than the prior day. So now we are waiting until next week.

A follow-through day (FTD) is at minimum a 1.25% gain with higher volume than the prior day. It ideally occurs between day four and day eight of an attempted rally. Friday was day five. Sometimes the FTD occurs a little later. If it occurs any time next week, that would be acceptable in my book. Especially if we start to see the indexes actually advance out of the choppiness of the last several days.

If that happens, that is our first potential buy signal. I don’t trade the indexes, but it gives me the green light for buying individual stocks that align with the patterns I trade. I start out small, only allocating about 20% of my capital. If the market indicators improve, then I start allocating more capital to more trades.

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 weak, suggesting conditions are not ideal for initiating long swing trades.

• 35% of S&P 500 stocks are above their 50-day moving average. 23% 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.
• Volume is not applicable currently, but it has been escalating on the decline. Friday’s volume was lower than Thursday's, so there was no follow-through day despite the nice end-of-week rally.
• 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. We have seen multiple days recently with big selloffs, followed by a big up day on Friday. Things are still volatile, typical of downtrends or potential turning points. We shall see.
• The blue line is the cumulative NYSE Advance Decline Line. It is as weak as the S&P 500, so it is confirming the down move so far. There is nothing interesting here.

The indicators are not currently pointing to anything positive. No reason to be buying yet. This doesn’t mean the indexes or some stocks can’t/won’t bounce higher. They may. But I have no interest in trying to catch the bottom. If things start looking better, then I will start buying stocks again. Until then, I am holding off.

What Am I Doing Right Now

I am scanning for stocks to buy that I like the look of. I want to be ready in the event there is a follow-through day this week. There may not be, but if there is, I will start picking up some trades. I will allocate more capital if the market health indicators improve.

If we don’t get a follow-through day, I won’t place any long swing trades. If we get a follow-through and the market health indicators don’t improve after, then I won’t allocate any more capital.