Judging the Stock Market Health | Podcast Episode #274

0:07
Hey, I’m Ryan Mallory, and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with swing trading the stock market in today’s episode, we’re gonna talk about judging the health of the overall stock market. What do I use to determine such things?

0:44
For today’s email, we got a guy by the name of Jeb. That’s what he asked me to call him. So Jeb’s a good decent Florida redneck name. In fact, we had a Jeb governor at one point, so I guess, I don’t know if I necessarily call him a Florida redneck, but it kind of works. Anyways.

1:00
Jeb Wrights. Hi, Ryan. Thank you for the education you have given me on trading stocks profitably by managing the risk. I’m subscribed to your Patreon account and I’m really enjoying the new video updates you are getting. For those who don’t know what Patron is, that’s swingtradingthestockmarket.com. That links to my Patron account that gives you all the access to all my additional market videos that I do for members only.

1:21
Definitely worth checking out. You’re gonna get updates on all my watch lists. You’re gonna get updates on the stocks that I’m following, potential setups. You’re going to get updates on all the big tech stocks and the market as a whole. That’s all I’ll say about it, but it does support the podcast. Jeb goes on to write. He says, My question today is, how do you judge the health of the market?

1:40
You mentioned the market breadth at times. Can you explain that? How do you determine it and what does it indicate about the market? Also, I know you talk about how many stocks are trading above their 40 day moving average. I also understand the VIX, the VXN, and maybe RXV can tell us something about the market. Health or even the emotions of the market, i.e. fear.

1:59
How do all these things work together to give an indicator of the market? How do you use these things? Are there any more indicators that you look at? You and my spidey senses, nice little Marvel reference, are telling me that I need to be very careful with my positions right now. Thanks again for all your help, Jeb.

2:15
OK, Jeb, good question. We’re gonna get to that in just a second, but first, what am I? Drinking, you know, we’ve had a good run on whiskeys of late, and I’m afraid that it’s about to come to an end here because I’m doing a Canadian whiskey. No offense to Canadians, I like Canadians, but Canadian whiskey is usually trash.

2:32
So this is an Ellington Canadian whiskey, and I’ve done 3 others in the past. The highest I’ve ever given one is a 4.8 out of 10. That was ensign red Canadian whiskey. I remember it, it wasn’t that bad, but most of them are like 1s and 2s. So I don’t have a high level of confidence with Canadian whiskey and I surely did not buy a full bottle of this stuff.

2:50
I got one of those little samplers. So, Canadian whiskey. How does this one look to the eyeball? Let me tell you, it looks like piss water. It doesn’t look good at all. To the smell, you get like this dull licorice, but mainly I’m just overwhelmed by the fact that it smells like a summer camp bathroom that has a strong chlorine stench from the swimming pool outside.

3:10
It’s not good. I don’t like the smell of it. I don’t like the look of it. This stuff just looks like something that somebody scooped out of an infield porta potty at a NASCAR race. But doesn’t mean it can’t taste good. We’ll still give it a try. I don’t know, man, the taste is bad too. It reminds me of like those unknown candies that Grandma used to have out on the table and one of those little trays.

3:31
You didn’t know it was in it. It was like wrapped up on both sides and it had like one of those like mush. substances, gooey substances on the inside. Don’t know what it tastes like. It usually was like in the shape of a pineapple or an orange or a strawberry, one of those things.

3:47
I don’t know. Maybe they don’t make those things anymore. They were just absolutely awful. You, you’d rather eat a stalk of celery. Didn’t eat one of Grandma’s candies back in the day, and that is what this stuff reminds me of. And on the finish, it’s pretty much just gags me. I mean, it’s nasty. And here’s my question. Why doesn’t Canadians make good whiskey?

4:04
I don’t know, maybe there’s a good one out there. If you’re Canadian, you can tell me one, let me know. But this Ellington Canadian whiskey is not good. It stinks. scale of 0 to 10, part of me wanted to go lower. I just, with some of the atrocities I’ve tasted in the past, I couldn’t, so I gave it a 2.2.

4:21
I mean, you guys got good water up there. I mean, don’t you have like freaking Niagara Falls or something? Like, you guys gotta make some good whiskey. All right, Ellington Canadian whiskey, 2.2. Now let’s get back to Jeb and his email about judging the market health. So there’s a number of things that I use to judge the market’s health and, and it’s pretty simple.

4:38
Systematic for me at this point. There’s times where things can be a little bit iffy, but by and large, it’s usually fairly simple to determine whether or not the market’s in a good place or not. Some of it just comes down to price and volume, just having a good understanding of technical analysis, understanding the candlesticks. If you’re seeing markets where there’s a lot of gaps lower or even just minor gaps lower, and then you’re constantly seeing the closing price above the opening price, good.

5:02
Sign right there that the buyers are consistently buying the dips and what we’ve seen of late in the market here in August of 2022 is a strong determination by the Bears. Up until just like the last couple of trading sessions, we would see new lows get formed and then you would see the algos come right in and start bidding up the market again.

5:19
It could be really infuriating if you were short the market, which I was a few of those times. But when you’re seeing the closing price always above the opening price, especially on the days where the market does finish down. That’s one sign that the Bulls are still trying to buy all of the dips.

5:35
Another one that I use is the percentage of stocks trading above the 40 day moving average. And that’s usually for me determine tops and bottoms in the market, not so much the in between, but there can also be divergences that you see in there, like, for instance, most of 2021, the percentage of stocks trading above their 40 day moving average was steadily declining throughout the year.

5:55
Meanwhile, the market overall continued to rip higher. That told me that more and more stocks were not participating in the market rally and it was becoming more dependent on your bigger companies like Apple and Google and Microsoft and Tesla and Meta and and. Amazon, on those companies, not the overall market, just fewer and fewer companies were participating, and that turned out to be true because in January, the market completely fell apart when the bigger stocks couldn’t hold their own anymore.

6:21
So I like to use that indicator for divergences, but also for extremes when it’s getting below 10% or if it’s getting above 75% to 80%. Another indicator, and a lot of you people, if not all of you have heard of it before, it’s volatility index, VIX, VIX. People trade it, they probably shouldn’t be trading it.

6:37
Because it is extremely difficult to trade with any success. I will not even touch a VIX product. TVIX UVXY, you name it, I’m not touching it. There is so much volatility and such a difficulty in trying to capitalize off of it. It’s where accounts go to die.

6:53
I also have a SharePlanner reversal indicator, and that’s got a little bit more proprietary stuff in it than I want to indulge upon in this particular podcast episode. But I do share the results of it quite a bit on. swingtradingthestockmarket.com and on the trading block.

7:09
Now, I asked about market bread. And what can we learn about market breadth here? Well, oftentimes, I like to see how strong the market rally is from an intraday basis because it can give you clues on whether or not it’s going to be able to sustain that move. If you got a market that’s up 0.5% on the day, but you have market breadth that’s like 6 to 1, meaning like for every one stock that’s going down, 6% is going up, that’s a good sign that that market rally is going to try to continue.

7:36
That there’s a broad-based participation. But on the flip side, if you see the market is up 1.5% and you have a negative breadth in the market, and believe me, it happens more times than you think. Let’s say there’s 1300 stocks advancing and 1500 stocks going down. That’s a negative breadth of 15 to 13.

7:53
There’s a good chance the market’s going to fall apart, or at the very least, you should be on high alert for the potential of a market falling apart, at least on an intraday basis. Then you have like the extreme breath readings, and that can happen when there’s a lot of euphoria or there’s a lot of panic in the market. So if you’re seeing a big.

8:10
Of and you’re seeing breath breedings a 7 or 8 to 1, that’s a good sign that the sell-off is going to continue if it’s 7 or 8 to 1 in favor of declining stocks. And the same thing can go with a good market rally. If you’re seeing market bread that’s 8 or 9 to 1, and that’s rare.

8:27
But if you’re seeing that and you’re seeing the market’s up 1.5% or so, or even 1%, as long as you’re seeing a decent rally out of the market, there’s a good chance that’s going to continue and you can start to look for clues for when it’s not going to continue by when that breadth is starting to shrink a little bit.

8:42
There’s also a thing called ticks, and I like to look at the ticks as well. They have it on Thinker. Swimming on most platforms, but that shows you at any given time, the net amount of stocks that are going up or down at a moment. So usually you get your most extreme readings at the open. So if we’re looking at a strong gap higher, you may see a tick well over 1000, maybe 1200, but if you get a tick over 1000 intraday, let’s say.

9:05
Middle of the trading session, that’s usually also a significant amount of price movement for that time of day, and that usually means there’s either some news coming out or something just changed in the markets and you want to be paying attention to it. Now, when you’re getting consistent 1000 ticks all throughout the day, that’s also a good sign of a trending market.

9:24
If you’re getting negative 1000 ticks, it all applies to you in the opposite direction just as when you have those positive ticks. So if you get a negative tick in the middle of the day. Should be wondering, OK, what was just causing that? Was there some news about that? What caused that negative tick to just register over 1000?

9:39
Cause that means there’s more than 1000 stocks going down at that particular moment in time. Than there are going up. That doesn’t necessarily mean that they’re all down overall in the day. It’s just at that moment, a net of 1000 stocks moved lower versus those that moved higher. So there was a broad-based movement there.

9:55
And you don’t usually see ticks get beyond like 14 or 1500 unless there’s something extreme going on to the upside or downside. When you see like 1600 ticks. That is some massive, massive movement and usually it’s going to happen at the beginning of the day. Other times you might see it is when there’s a large cap name that comes out with some really bad news or if there’s a geopolitical event that just happened or when there’s the FOMC statement that comes out, there’s a number of things that can cause those big ticks in the middle of the day.

10:24
But the majority of them tend to happen right at the market open. And we were talking about intraday behaviors about buying the dips all the time. And that’s the other thing too is like when you’re seeing the intraday behavior where every market sell-off instantly gets bought up, that shows you a good idea of who has control of the overall market.

10:41
Is it the Bulls? Is it the Bears? If you’re seeing the dips get bought up each and every time, that means the Bulls have it. If you’re seeing the rips get sold, that means that the Bears have it. And sometimes it can change from one day to the next or you’ll see it from a day to day basis. It’s always the same. And then you want to start. Looking for when that narrative doesn’t apply anymore when you start to see a change in the behavior of the algorithms and the program buying and on the hedge funds and with Wall Street, then you start to get an idea that things may be changing to the opposite direction.

11:06
I also like to know from a sector standpoint, how many of our sectors are trading higher on the day. I can’t tell you how many times I’ve been tipped off that a stock market may not keep it together on the day because of how many sectors are trading lower overall. You’ll get something like 10 out of 11 sectors trading lower in the market.

11:22
It’s up 0.5% just because all of your big tech stocks are trading higher, but you’re seeing the rest of the market trading lower. So that’s usually a good sign and that usually goes hand in hand with the market breadth as well. And then if you do see a lot of stocks that are trading higher on the day, but you don’t see necessarily the NASDAQ and the S&P trading higher on the day, look at the Russell 2000s, the Russell 2000 showing a lot of strength because sometimes that can go completely opposite of the rest of the market.

11:46
And if that’s the case, there’s a lot of small cap stocks, more small cap stocks than mid or large cap stocks. So if all the small cap stocks are rallying, but none of your large caps are and you have a strong market bread, that’s a good sign. That there’s a strong rotation back into small caps.

12:02
And then you have, speaking of large cap stocks, then you have the bank stocks, that’s your Facebook or Meta, whatever you want to call it. Amazon, Apple, Netflix, Google, Microsoft, Tesla. You can also throw in Nvidia, that’s probably more important now to the market than Netflix, yet we still talk about Netflix.

12:20
But when you see those companies starting to falter, Also a very concerning sign that there may be an issue with the market, or when they’re continuing to rally higher, it’s going to be very difficult for the market to have a sustained sell-off, especially with Apple. If you get Apple and Microsoft just rallying on their own, Apple’s twice the size of the energy sector.

12:39
If they’re the ones that are rallying, it’s going to be hard for the Nasdaq or the S&P to fall apart, even if all their other stocks are primarily selling off. They can lift up an entire market. It’s quite Remarkable. So, to wrap this up, let’s stay away from the Ellington Canadian whiskey. That stuff is garbage.

12:55
And then, when it comes to judging the health of the market, having a good understanding of technical analysis, and we can talk about that stuff for days. That’s why I’m not really digging into the technicals too much, but also knowing, you know, about the candlesticks, the Japanese candlesticks. Then you have the percentage of stocks trading above their 40 day moving average.

13:11
Another one you could throw in there is the 200 day moving average. Yeah, the volatility index, that also is important. We didn’t touch too much upon that except for really don’t trade the TIC or the UVXY. Then you got the SharePlanner reversal indicator. That’s something that I provide to members of the trading block with swingtradingthestockmarket.com.

13:29
Then keep an eye on the sectors. You have 11 of them. You have materials, you have financials, you have industrials, you have discretionary and tech and utilities and staples, and energy. And did I say financials? I’m not sure. I’m probably gonna repeat some of them here, but you have real estate and you have communications.

13:47
And you have healthcare. There’s a bunch of them out there, right? 11 of them in total. So keep an eye on how those are doing on a day to day basis. Don’t be afraid to look at those individual charts to get a better understanding for where this market’s going. Keep an eye on the FA stocks and keep an eye on the intraday behaviors of the market.

14:04
Are they buying the dips? Are they selling the ribs? And from time to time throughout the course of a trading day, check out. The market breath. All right, guys, you enjoyed this episode. Be sure to leave me a 5 star review on the podcast platform of your choice. I do read them, I appreciate them, and they help me continue to build the audience.

14:22
It’s something that I definitely appreciate. Also, make sure to keep sending me your emails, ryan@shareplanner.com. I do read them all. I try to make episodes out of each one of them. So keep sending me those emails. And as always, thank you guys and God bless. Thanks for listening to my podcast Swing Trading the stock market.

14:39
I’d like to encourage you to join me in the SharePlanner trading block where I navigate the stock market each day with traders from around the world. With your membership, you will get a 7-day trial and access to my trading room, including alerts via text, And WhatsApp. So go ahead, sign up by going to shareplanner.com/tradingblock.

14:58
That’s www.shareplanner.com/trading-block, and follow me on SharePlanner’s Twitter, Instagram, and Facebook where I provide unique market and trading information every day. If you have any questions, please feel free to email me at ryan@shareplanner.com.

15:14
All the best to you and I look forward to trading with you soon.