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Swing Trading Outlook for US Equities

September 25, 2019 By Cory Mitchell

Current conditions still warrant swing trades. Discussed here is the current stock market outlook, as well as the hottest sectors right now to be looking for trades.

The purpose of these swing trading outlooks is to determine how the market is moving and whether it is a good time to be actively swing trading, trading cautiously with reduced position sizes or less capital deployed, or whether it is time to sit on the sidelines. Right now, conditions indicate to take swing trades, but to be highly selective and/or reduce position size if taking multiple positions.

The S&P 500 is still in a bullish pattern, but which sectors are going to emerge as the new leaders going forward is unclear at the moment. We’ll discuss both these points, in order, below.

First, let’s look at the S&P 500. Not much has changed since the September 12 outlook.

  • The price action is still bullish based on the breakout from a recent range (blue box). The top area of that range, around 2945, could now act as support. The price is also working its way toward the top of the trend channel with a target of 3100 for mid- to late-October.
  • Also bullish is the 3 major upside days that occurred during that range (based on upside volume and number of stocks advancing). Historically, after this has occurred the S&P 500 has moved higher by 13% over the next year.
  • The NYSE advance-decline line has also pushed to new highs ahead of the S&P 500. This shows that a wider stock base than the S&P 500 is moving higher. On almost every occasion when this has occurred the S&P 500 has followed and made new highs.
  • A drop below 2822 indicates the market has entered a more ranging or bearish period.



S&P 500 Still in a Bullish Pattern Despite Few Day Sell-Off by CoryMitchell-CMT

If the small caps can join in the rally, that would really fuel an overall tone of bullishness, since small cap stocks (those smaller names) are more speculative. When people are confident enough to be speculative, that is bullish.

The following chart shows the relationship between IWM (small cap ETF) and SPY (S&P 500 ETF which is large+ caps). Large caps have been outperforming the small caps all year. At the start of September, the small caps outperformed the large caps, recouping a bit of ground. Since the spike higher though the small caps have faded. I want to see this ratio (IWM/SPY) push back above 0.53 to indicate the small caps are once again outperforming large caps. This would set an even stronger overall tone for the market. It’s important to note that this doesn’t need to happen! It is just something to keep an eye on for a few reasons.

  • When small caps perform well, there are lots of them, so it provides for lots of swing trading opportunities.
  • When small caps perform well, it means investors are willing to take on a little more risk. They are confident and have money in their pockets, which is bullish.
  • Keeping an eye on different segments of the stock market helps narrow down where to look. If small caps are performing well, for example, and big-name stocks aren’t performing as well, when screening for stocks to swing trade you can narrow down your screener results by only looking at small caps.

small caps versus large cap stock sept 25 2019

Sectors to Watch

This week, so far, the gold stocks (GDX) are the only sector solidly in positive territory. Gold was discussed in Gold Will Set Up For Another Buying Opportunity, But Not Yet. Consumer Staples (XLP) are just barely in the green, while all other sectors are down.

sector ETF performance as of sept 25 2019

The following weekly charts show the price trends of the sector ETFs over the last year. GDX and Consumer Staples are in uptrends and currently consolidating. XLP is holding up well within a tight pattern. This sector could continue to runif it breaks the consolidation to the upside.

sector charts ranked by performance over week

RWR, representing REITs or real estate, is also at highs. Not traditionally a big mover, but a break higher would signal continued strength.

Materials (XLB), technology (XLK), financials (XLF), consumer discretionary (XLY) and industrials (XLI) are all sectors hanging out near highs. That is what makes this a bit tougher environment right now. We don’t know which ones of these sectors are going to do the best going forward, and until they breakout most trades in these sectors are likely to chop around, stopping us out. Therefore, in these sectors it pays to be highly selective, only buying names that held up the best, or that have been rallying aggressively lately while the indexes have floundered, and are likely topop on any market or sector strength.

Swing Trading Outlook Right Now

It’s interesting because the S&P 500 index is in a bullish pattern. As we can see though, there isn’t a lot of leadership within the sectors. Once we start seeing upside breakouts in the bulk of thesectors, then more swing trades are likely to do well. Right now, I’d be looking for swing trades in gold, although I do think we could get a bit more of a correction. Trade the names that hold up the best into any weakness. Consumer staples and REITs are also pockets to look for trades in. Staples and REIT stocks don’t move as much as some other sectors, but that also means that position size can be increased due to the smaller risk as well. This helps reduce the effect of smaller percentage movements.

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, or even more than you deposited if using leverage.

By Cory Mitchell, CMT @corymitc