On 12/9/14 our Twitter momentum indicators for several of the indexes gave consolidation warnings. Among them was a warning for the S&P 500 Index (SPX). This warning comes as a result of a strong rally in price that had a negative divergence from quantified tweets and a subsequent break of the bullish trend on the Twitter stream. When Twitter momentum diverges from price and breaks lower it signals that the herd is changing direction. It shows up on the Twitter stream as fewer traders tweeting about purchases and more market participants becoming skeptical of the rally. In addition, the Trade Followers algorithm picks up more tweets that contain selling, raising cash, or hedging.
Although 7 day momentum has broken trend and is now below zero, the daily readings are not extremely negative. Many market participants still believe SPX can rally into year end. This hope is muting the the downward pressure of tweets with negative bias or actions.
Another sign of hope for the bulls comes from small cap stocks (IWM). Momentum from both the StockTwits and Twitter streams are still confirming IWM’s uptrend as price paints a bullish consolidation pattern above its 50 and 200 day moving averages. 7 day momentum from Twitter is compressing in a triangle that often precedes strong moves in price. If momentum and price can move above their current resistance lines the odds favor higher prices for all indexes into the end of the year. A failure from here would would indicate a correction that would most likely carry to at least the October lows.
Breadth calculated between the most bullish stocks on Twitter and the most bearish is diverging from price, but still printing healthy readings. Breadth is slowly falling due to fewer strong stocks making the list, however there isn’t a large increase in the number of weak stocks. This is surprising given the fact that new lows on the New York Stock Exchange (NYSE) and Nasdaq are increasing rapidly. It indicates that traders and investors are becoming more optimistic about beaten down stocks as price falls.
The message from social media this week is profit taking with a bit of hope. The hope manifests itself with small negative prints on the daily indicator for SPX, confirming upward momentum for small cap stocks, and the lack of new stocks in the most bearish lists. The market can still stage a year end rally, but is in danger of a large decline if hope is lost.