Image Source: Pixabay

Monday, July 4 is a holiday in the US. The US stock market is closed, yet the Canadian market is open.

There was a follow-through day on June 24. The market has pulled back since then, but that follow-through remains in effect. A follow-through day is often one of the first signals of a potential turnaround. Yet, most of the other market health indicators are still in poor shape.

This is a time to be scanning, looking for quality setups, and seeing how they move, but I’m not aggressively buying yet. The time will come. I haven’t seen enough stocks moving strongly to the upside to get me excited yet. This remains a bear market until proven otherwise. I am deploying minimal capital to long swing trades.

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’s what each of the 4 indices represents:

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

2 Canadian stock indices are also included. The Composite tracks larger companies, while the Venture tracks very small companies. Those are regression channels on most of the charts – they create a channel of “the best fit” to the price action, helping to highlight the overall trend.

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

All the indices are in overall downtrends. The US indices have been trying to push higher the last couple of weeks. The Canadian indices are near lows as oil stocks have sunk recently.

The follow-through days in the S&P 500 and Nasdaq 100 are the first signal to potentially start taking some long trades in strong stocks that are forming quality setups. But capital deployment should be minimal at this stage. If the market health indicators improve, then I’m willing to deploy more capital to long trades.

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’s a good time to swing trade individual stocks.

The market health indicators are trying to improve.

• 23% of S&P 500 stocks are above their respective 50-day moving averages. 31% of all US stocks are above their respective 50-day moving averages. It’s generally much easier to swing trade profitably (on the long side) when more stocks are above their 50-day averages. When this indicator is below 50%, it tends to look like a sideways move or a downtrend for most stocks/indexes.
• Volume was relevant on June 24 when it increased with the 3% price rise to create a follow-through day.
• 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. I am still seeing some big swings, such as the 2% drop on June 28. This is not uptrending behavior.
• The blue line is the cumulative NYSE Advance-Decline Line. It is currently showing a positive divergence as it held above its prior low (green line), while the S&P 500 has made a lower low over that time frame. That is bullish, but not enough to act on alone. This indicator is positive.
• The blue columns are NYSE up volume divided by NYSE total volume. This tracks buying and selling enthusiasm. The last key level was a 92% downside day on June 16. This indicator remains bearish.
• The ultimate indicator is how many quality setups there are and how trades are working. I ran a quick scan and there are some decent-looking setups, and more that could develop over the next week or two. As mentioned though, it is very early in this rally. As the health indicators improve, I would expect to see more quality swing trade setups in individual stocks. So, I will be watching for that.

What I’m Doing Right Now

I will be keeping an eye on what stocks are setting up. I may deploy some capital to quality setups, as we do have a few of the health indicators in our favor. But before I get more aggressive, I would want to see the health indicators improve some more. So, I am deploying minimal capital on long trades, currently.

I am also day trading, as always. There is much movement and opportunity when day trading stocks, but I primarily day trade the EUR/USD currency pair every morning for one to two hours. There is a lot of potential there as well.

Take the time to refine your strategies while the market is weak. Don’t let the time go to waste.