Stock Market Health Update For Swing Trading - Week Of Feb. 14

The market remains in conflict. For this reason, I am limiting the amount of capital I deploy into swing trades. My current cap is 20-25% of my capital; deploying less is also fine. This amount can spread out over multiple trades if I see them, or concentrated in a few positions.

On Jan. 31, there was a follow-through day. This often, but not always, signals a reversal in the major indices. It is the first indication to start looking for some long swing trades, but with limited capital until the market health indicators improve.

If Jan. 31 is a follow-through day (FTD), we should call Feb. 11 the throw-up day, where the price undercut a swing low on bigger volume and with a big price drop. It rattles the cage of many traders. It doesn’t mean anything in terms of analysis, but it does represent the feeling many investors have right now.

But let’s look at this objectively. Any swing trades that formed a good setup and broke out are actually doing pretty well. Therefore, I am personally sticking with the follow-through day scenario and I am still willing to deploy a portion of my capital -- but with caution.

When I trade with caution it means I am more likely to get out trades that are working if the price starts to turn against me. We already know conditions are not great, so if a trade is in a nice profit and then reverses course, take the profit. Without the confirmation from the market health indicators yet, we still could have a big down move in the indices and most stocks.

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.

US and Canadian major stock indices comparison Feb 13

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, tracked by the Russell 2000 and the TSX Venture (in Canada), have been hit the hardest.

The Canadian TSX Composite index, which includes lots of commodity-related stocks, has bounced aggressively and moved back to the prior swing high and near all-time highs. A number of swing trades that triggered over the last couple of weeks were Canadian and have done pretty well (HME, HMHC, SALT, and more recently REGN on the US side).

Overall, The conditions out there are mixed to rough. Tread carefully by only using a portion of capital. Now is not the time to be aggressive - yet.

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.

S&P 500 index with market health indicators Feb. 13

  • 39% of S&P 500 stocks are above their 50-day moving average. 35% 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 50%, but it has been improving since late January. Watch if the indicators starts dropping below the recent rising trendline; that’s not good.
  • Volume is not currently applicable. On day 6 of the attempted rally 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 currently nothing of interest here.
  • 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. Big back-to-back drops of 1.8% and 1.9% on Feb. 10 and 11 show that 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 long swing trades. The rest stays in cash or is used for day trading.

There are also definitely swing trading setups that are working from the prior two stock watchlists. So that is also encouraging.

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 ...

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