Stock Market Health Update for Swing Trading - Week of March 14

The stock market health indicators are in poor shape.

Pixabay

There are still some pockets that are performing well, such as stocks related to commodities.
I am open to deploying some (not all) capital in these strong stocks assuming they stay strong and good setups continue to form.

A Follow-Through Day this week would signal a possible turnaround in the indices. More on this below.

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 is what each of the 4 indices represents:

• Nasdaq 100 – Tech stocks
• S&P 500 – Large companies
• NYSE Composite – A wide array of stocks , varying in size and industry
• Russell 2000 – Smaller companies

I have also started including 2 Canadian stock indexes for those in Canada. The Composite tracks larger companies, while the Venture tracks very small companies.

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

All 4 US indices are in downtrends right now, making lower swing highs and lower swing lows in price.

The Canadian TSX Composite Index made a higher swing low in late February and has been rallying since. That said, it’s basically moving sideways since mid-Oct. This index is dominated by commodity-related stocks, which have fared better recently than most other sectors.

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.

• 25% of S&P 500 stocks are above their 50-day moving average. 33% 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%.
   
• Volume is not important at this exact moment. Between day 4 and 10 (Monday will be day 4) of this rally I want to see the S&P 500 move up at least 1.25% on higher volume than the prior day. This would create a Follow-Through Day. Until then, I don’t really care about volume. Follow-through days are often one of the first signals of a potential turnaround.
   
• 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. We’ve had many big intraday swings in price. That is representative of downtrending/choppy behavior.
   
• The blue line is the cumulative NYSE Advance Decline Line. It’s as weak or weaker than the S&P 500. No insight here; it’s also trending lower.
   
• The columns of blue ( I like blue, ok!) are NYSE up volume divided NYSE total volume. It is an indicator of buying and selling enthusiasm. Levels below 10% and above 90% are important (or back to back above 80%). Nothing Important here at the moment. The old way of creating this indicator no longer seem accurate. I created an indicator called UpVol/TVol NYSE Lowry Upside Days. You can search for it and add it to your chart from the Indicators tab (may not be available yet…might need to go through a review). You can also view it here, click Favorite as you scroll down, and then you should be able to see it in your indicator list.

What I’m Doing Right Now

These have been some of the best “tough” conditions (according to the Market Health Indicators) I’ve seen. So far it has been a pretty lucrative decline in the overall market, with commodity stocks continuing to form setups and follow-through to the upside.

Most of the trades that are forming the contraction patterns are working. These have nearly all been focused on the commodity sector. While the general market conditions are poor, that segment of the market is doing well. As long as it keeps working, I will continue to trade it.

I am scanning for stocks to buy that I like the look of. I’m willing to deploy minimal amounts of capital from my account for long swing trades (pretty much all commodity-related right now). 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). I am primarily day trading stocks with recent earnings, but I’m willing to trade any stock with the potential to move significantly, such as those on the Best Stocks for Day Trading list.