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Over the past week the stock market took a hit, as seen by a big drop on Tuesday and then some follow-through selling into the end of the week. Health indicators are back into poor health. I’ll continue to scan as conditions can change quickly, although I am not taking new positions at the moment.

I do have some positions from before. Some got stopped out, some are doing well, and others are near stop out levels. Overall, unless we start moving up relatively soon, I will be back in cash as current positions get trailed out. But, if we do get a bounce, I’ll still have some exposure in stocks that have been holding up very well despite the recent market weakness.

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.

Two Canadian stock indices are also included. The Composite tracks larger companies, while the Venture tracks very small companies.

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

All the indices had a rough week. From a price action perspective, the short-term downtrend (part of a longer-term downtrend) that started in mid-August is still in full effect, dropping below the early September swing lows.

Downtrends are composed of lower swing highs and lower swing lows, and that is what we have right now in the US indices. The Canadian indices are in the same boat, but they are still above the earlier September lows at the moment. We need to start seeing some higher swing highs and lows in order for a bull case to be made.

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 poor.

• 24% 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 signal sideways movement or a downtrend for most stocks/indexes. This indicator is poor.
• Volume was relevant on June 24 when it increased with the 3% price rise to create a follow-through day. Big drops on high volume were seen on Aug. 26 and Sept. 13, and these are what I call throw-up days. This often signals a further short-term decline - which has already unfolded.
• 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 saw a drop of more than 3% on Sept. 13. This is a poor indicator.
• The blue line is the cumulative NYSE Advance-Decline Line. It moved above its early April high before the S&P 500 moved above its April high. That is a bullish divergence and signals that the S&P 500 is likely to reach the April high before a new low. The indicator also stayed above its Sept. 6 level while the S&P 500 recently fell below its Sept. 6 level. This is a decent indicator.
• The blue columns are NYSE up volume divided by NYSE total volume. It tracks buying and selling enthusiasm. There was a 90% upside day on Sept. 9 (manually calculated, as the indicator just provides an estimate) and a 93% downside day on Sept. 6. This is a poor indicator.
• The ultimate indicator is how many quality setups there are and how trades are working. I have continued to take trades over the last couple weeks with reduced position sizes. I didn’t take new trades after Tuesday’s decline. I have had a couple stop outs. Some trades are doing quite well, and others are flat or nearly stop out. So, my results are basically telling me the same thing the market is: things are choppy and still a bit rough. It is better to be more cautious than aggressive.

Sectors on the Move

Everything tumbled this past week. Energy has held up the best over the last week and month. Over the last three months, consumer cyclicals, industrials, healthcare, and finance have been the top performing (non-defensive) sectors.

Sector performance provided by Finviz.

What I’m Doing Right Now

I’m not adding new long swing trading positions right now. I’ll wait for conditions to improve.

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