Stock Market Health Update For Swing Trading - Week Of Jan. 24

Overall, stock market health conditions appear to be 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.

However, taking short trades is an option, such as trading descending channels. 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.

US and Canadian stock index comparison and analysis Jan 23

Everything is abysmal. There are downtrends in the Nasdaq 100, S&P 500, and Russell 2000, as well as the Canadian indices. The NYSE Composite is just barely above its prior swing low. But it has been moving mostly sideways since May anyway, so the price is just whipsawing up and down.

There is no reason to buy until we start to see improvement.

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

S&P 500 chart with market health indicators January 23

  • 32% of S&P 500 stocks are above their 50-day moving average. 22% 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 has been escalating on the decline.
  • 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, we can see that there has been very little Up-volume over the last several days (almost all down volume).
  • 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 multiple days recently with big selloffs.
  • The blue line is the cumulative NYSE Advance Decline Line. While the S&P had moved above its November and December high points in early January, 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. So far it hasn’t.

The indicators are not currently pointing to anything positive. There is 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 not buying into any swing trades currently. I am in cash. I may consider some short trades, or possibly buy an inverse ETF (goes up and the market drops), but these are typically very short-term trades, and I don’t usually put much capital toward them.

I am willing to make some “earnings play” trades, but given the market conditions, my position size will be small if I do end up taking any of these. Also, if any trades are taken in these poor conditions, I am using an aggressive stop loss and I am out at any sign of a reversal in the stock. No reason to “hold and see what happens” when we already know conditions aren't favorable.

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

Disclaimer: Nothing in this article is ...

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