Monthly Archives: October 2014

Improve Trading and Investing with Social Media

On Monday I had the honor of presenting on behalf of Trade Followers at Stocktoberfest. Thanks to all who came to see the presentation. Also a big thanks to Howard, Jenn, Mike, Sean, and the rest of the StockTwits team for a great conference. For those of you who couldn’t attend below are the slides from the slide show you can review. If you have any questions I’ll be glad to answer them. Just email me or reply to this post.

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Indexes Trying To Clear Warnings

On 9/28 our social media indicators were warning of lower prices for the indexes. Today they are trying to clear those warnings. Here are the updated charts.

Small caps (IWM) were the first to warn and the first to break back above the confirming down trend line. Bargain hunting and short covering have helped small caps recently.

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Nasdaq 100 (QQQ) has broken the trend line, but is having trouble gaining traction with 7 day momentum on both Twitter and StockTwits. It is barely bouncing above the zero line, but should trend upward if the intra-day readings from our algorithm hold into the close.

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The S&P 500 (SPX) is still confirming the downtrend and today’s intra-day readings are more tepid than QQQ. As I mentioned in the weekend update I’d like to see higher highs in 7 day momentum for confirmation that the uptrend has resumed.

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Stocktoberfest

The chart below shows a trade I made in Google (GOOG) last year that lasted several months and had a lot of fun events along the way. I’ll be using it as a part of a presentation at Stocktoberfest next week to highlight the impact social media is making on trading and investing. The chart was created on 10/5/14 and still had an unresolved triangle pattern.

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It has now been resolved…to the downside.

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Back to Prior Support

I mentioned last week that the 1905 level on the S&P 500 Index (SPX) was critical support without any other significant levels below which put the market in a precarious position. Here’s a quote from the post.

1905 on SPX is a strong support level. Below that there are scattered tweets, but nothing definitive. The lack of tweets below the market indicates hope and optimism from market participants. This can be dangerous near a strong support level because any break lower will turn hope into uncertainty and fear. 1905 on SPX is a must hold support level or we could see a cascade that carries price quickly to 1880 or 1850 where a small number of traders are tweeting support.

As it turned out 1905 was broken on Monday and SPX quickly fell to 1880. On Wednesday the next level of support tweeted by traders at 1850 was violated and SPX fell to 1820 before rebounding. The market is now just below the 1900 level and getting ready to retest the 1905 support level as resistance. This is the first hurdle for the bulls. The next two resistance areas are 1925 and 1955, with hope back at the all time high.

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If the market turns over, support comes into play at 1875, 1850, 1800, and 1750. Some fear came out on the Twitter stream last week with several people tweeting levels as low as 1500 and 1600. The wide range in tweets below the market suggests a lot of damage was done to investor sentiment by last week’s sharp decline.

Another sign of decreasing investor sentiment is our social media momentum indicators created by quantifying Twitter and StockTwits messages. After painting a negative divergence with price in late September both indicators have been making lower lows which confirm the decline in the market. The odds favor lower prices until momentum creates a positive divergence or surpasses its last peaks.

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Breadth between the stocks with the most support on Twitter and those with the least support (bullish vs. bearish) continues to decline. The most bullish list has the fewest number of stocks of the year, while the bearish list is approaching yearly highs. Traders are seeing fewer stocks as long candidates and more as shorts.

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Sector ETFs on the Twitter stream shows wide spread damage in the market. Only energy and financials managed to print readings above zero last week. This is a small positive and most likely the place where leaders will emerge if the market is going to continue the current rally.

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Overall social media readings suggest the market has some headwinds. Traders are showing fear and uncertainty with a wide range in price targets, the text of tweets is mostly negative, and fewer stocks are being mentioned as buying opportunities. The bulls need SPX to clear 1905 with Twitter and StockTwits momentum confirming the move by painting higher highs or the odds will favor a retest of the recent lows.

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Twitter Top Ten Portfolio Falls Hard

The Twitter Top 10 portfolio is falling hard this month. It is down over 6%. The only stock that is positive on the month is FireEye (FEYE) up almost 3%. The broad based selling of momentum stocks is similar to what we saw in January and March. The portfolio never recovered from those declines and indicates an aversion to risk since the first of the year. One thing that is different in this decline is the S&P 500 Index (SPX) is falling sharply too. This suggests that investors are selling everything (not just momentum and risk). If the market is going to recover it will need participation from the most loved stocks on Twitter.

Below is a performance chart and details of the current holdings.

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Start Date Symbol Shares Start Price Start Total End Price End Total % Gain / Loss
10/3/2014 $TWTR 279 53.94 15049.26 49.05 13684.95 -9.07%
$BAC 710 17.29 12275.90 16.27 11551.70 -5.90%
$FEYE 403 28.19 11360.57 28.97 11674.91 2.77%
$NKE 126 90.29 11376.54 87.39 11011.14 -3.21%
$MSFT 247 46.09 11384.23 43.55 10756.85 -5.51%
$LULU 270 42.07 11358.90 39.10 10557.00 -7.06%
$FDX 70 162.74 11391.80 155.65 10895.50 -4.36%
$MU 335 33.94 11369.90 28.65 9597.75 -15.59%
$HIMX 1173 9.70 11378.10 8.64 10134.72 -10.93%
$PLUG 2485 4.56 11331.60 4.39 10909.15 -3.73%
Cash 68.35 68.35
Totals 118345.15 110842.02 -6.34%
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StockTwits Top Ten Has Broad Based Selling

The StockTwits Top 10 portfolio is experiencing broad based selling this month. Not a single stock has dodged the market weakness. So far this month the stocks are down between 3% and 17%. The portfolio as a whole is down 7.5%. This is a strong indication that investors are reducing risk (similar to the March dip). Keep an eye on these stocks during the next bounce to see if they recover. If they don’t it will give warning about further declines in the general market.

Below is a performance chart and details of the current holdings.

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Start Date Symbol Shares Start Price Start Total End Price End Total % Gain / Loss
10/3/2014 $MU 355 33.94 12048.70 28.74 10202.70 -15.32%
$BAC 616 17.29 10650.64 16.26 10016.16 -5.96%
$NKE 118 90.29 10654.22 87.64 10341.52 -2.93%
$LULU 272 42.07 11443.04 39.32 10695.04 -6.54%
$CELG 111 95.21 10568.31 88.5 9823.50 -7.05%
$MSFT 231 46.09 10646.79 43.58 10066.98 -5.45%
$FDX 65 162.74 10578.10 155.99 10139.35 -4.15%
$C 203 52.32 10620.96 50.14 10178.42 -4.17%
$GS 56 188.07 10531.92 176.3 9872.80 -6.26%
$FSLR 149 64.10 9550.90 53.54 7977.46 -16.47%
Cash 283.78 283.78
Totals 107577.36 99597.71 -7.42%
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Watch Investor Action

I’m seeing the same type of pattern being painted between traders and investors as I did in late August where traders had bought the bounce in small caps (IWM), but investors (RUT) didn’t. You can read that post for details on the pattern.

The short story is traders are buying small caps and investors aren’t. Traders aren’t aggressively buying the S&P 500 Index (SPY) and investors (SPX) are still negative on the index. Keep an eye on the strength scores between IWM and RUT and also SPY vs SPX to see if traders start to sell or investors start to buy. It’ll give you clues to the next direction of the market.

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IPOs Take Patience

I’m a fairly conservative investor/trader so I don’t often buy IPOs until the stock has traded for several months and had a chance to shake out (and pass lockup periods). Using Trade Followers momentum computed from Twitter and StockTwits offers a nice tool to help me be patient and wait for the initial hype for the IPO subside. What I like to see is the stock establish a trend and see social media momentum stop painting patterns of chasing.

Here’s an example with Twitter (TWTR) over the last year. After the initial rally from excited buyers, TWTR started a downtrend that was confirmed by 7 day momentum (lower highs/lows as price fell). Then in February momentum finally painted a positive divergence with price that had lows more than three weeks apart. It was also painting lower highs which compressed momentum in a triangle. A break higher from that triangle would have created a buy signal, but it wasn’t to be. Instead, momentum broke lower in March which indicated TWTR had more work to do on the downside. May brought another positive divergence, triangle, then a break higher. This created a buy signal that ended up being a good long term entry point. It also provided a good trade for traders that like counter trend bounces.

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Here are some recent IPOs that I’m watching with annotations on the charts. The short story is that I’m still patiently waiting for the shake out to complete.

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Watch The Bounce Redux

The Trade Followers momentum indicators for the S&P 500 Index (SPX) continue to confirm lower prices with a series of lower highs. After trying to bounce, SPX broke through the 1955 support level that has been important on the Twitter stream for several weeks. It closed Friday near the next major support level of 1905 with 7 day momentum painting a small positive divergence with price. This divergence is a result of market participants tweeting that it’s time for a bounce. Many people are mentioning the 200 day moving average that hasn’t been touched in almost two years. Others are comparing this dip to previous declines during the long term rally. This suggests that a short term bottom is near. 

Once that low is in place it will be again time to watch the bounce. Since this bounce is coming from an obvious support level I’d like to see 7 day momentum paint a higher peak than the last two to indicate higher prices are ahead. A break of the current down trend line will provide hope, but not confirmation of a sustainable rally.

If the market continues to fall and 7 day momentum paints a lower low it will confirm the down trend and suggest that a larger correction is underway where rallies will likely fail.

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Breadth from StockTwits and Twitter continue to deteriorate with fewer bullish stocks making the cut and at the same time more bearish stocks showing up in the lists. Last week I mentioned that finance, health care, and technology were holding up and that their performance gave some hope to the bulls. Unfortunately, those sectors experienced heaving selling on Friday with many of the stocks that had held up suffering declines of 5% or more. Without their support it will be difficult for the market to rally into the end of the year.

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As mentioned above, 1905 on SPX is a strong support level. Below that there are scattered tweets, but nothing definitive. The lack of tweets below the market indicates hope and optimism from market participants. This can be dangerous near a strong support level because any break lower will turn hope into uncertainty and fear. 1905 on SPX is a must hold support level or we could see a cascade that carries price quickly to 1880 or 1850 where a small number of traders are tweeting support. Above the market 1955 and 2010 are the most tweeted levels with a small cluster near 1975. Watch those areas as likely resistance.

Sector strength shows positive readings in all of the defensive sectors and in financials, technology, and industrials as well. However, much of the strength in leading sectors came early last week. Friday saw a large decline in support for those sectors.

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Overall social media is suggesting that traders are expecting a bounce near current levels. However, a break below 1905 on SPX would likely cause a swift drop before the market could catch. The nature of the next bounce should give us a direction for the rest of the year.

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Weak vs. Strong

Over the past month I’ve been mentioning that finance, health care, and now technology stocks are holding up best during declines. They are emerging as new leaders and should be where the money flows if we get a rally into the end of the year. They can also give us some clues to the “will the market rally” question. Those three sectors need to hold up on a relative strength basis to keep the rally prospect alive. Caution will be warranted if those sectors start to show up in the weakest stocks list. If they do then the odds will favor at least an intermediate term correction that is larger than we’ve seen for a few years.

So far this decline hasn’t destroyed the possibility of a year end rally. Technology, health care, and finance still have a good showing in the most bullish list. Below are the strongest stocks on Twitter yesterday during a steep decline. Financials have the weakest showing, but further down the list (not shown) are a few financials. Bank of America (BAC) is an example.

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On the one day bearish list there are a lot of stocks from the leading sectors, but notice the weakness is mostly contained to yesterday. One day doesn’t make a trend, but can start one so keep an eye on the 1 week and longer bearish lists to for clues that the market is starting a larger correction.

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One more thing that should give the bulls hope is the sector relative strength list. Notice that the recent weakness hasn’t broken the backs of the bulls. The bearishness lacks both breadth and duration. There aren’t a lot of negative sectors across almost any time frame. If this chart starts to show more negative sectors it will be a sign of bulls standing aside and not buying the dip for the first time in a couple of years.

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