Last week we highlighted several signs coming from Twitter that a short term top was in the making. One of them was Twitter momentum for the S&P 500 Index (SPX) turning down from over bought levels and at the same time creating a negative divergence. This week momentum is warning that the selling we saw last week will most likely continue. After painting a negative divergence, 7 day momentum has broken its newly formed uptrend line. This suggests that investors and traders are not committed and were quick to exit positions established during the February rally.
Breadth computed between the strongest and weakest stocks on Twitter is still printing healthy readings. However, the large positive prints are a result of a lack of bearish stocks rather than an increase in the number of stocks with bullish readings. The number of bullish stocks has fallen by 20% since mid February while the number of bearish stocks has been cut in half. This puts breadth in a position that it could fall rapidly if the number of weak stocks starts to increase.
Last week SPX paused at the first Twitter support level of 2100 then on Friday the market fell to the next Twitter support level at 2065. SPX is holding just above that point. If it breaks it puts 2040 in play. There are virtually no tweets for prices below 2040 on SPX. This indicates that traders aren’t showing any fear yet. It also puts the market in a precarious position where a break of 2040 will take market participants by surprise which often leads to a waterfall decline. Resistance gleaned from Twitter is at 2100, 2120, and 2140.
Last week we mentioned that short term tops have occurred almost every time all sectors showed positive readings. After those positive readings we did in fact get a top. This week the positive readings are still in play, however the defensive sectors of consumer staples and utilities have weak positive readings. This suggests that investors aren’t rushing into them. This is most likely a result of the strength the defensive sectors showed during the first of the year. It adds a concern that if the market starts to decline there will be no where to hide because the rotation to safety has already occurred.
Overall social media indicators are suggesting that we’ll see more volatility ahead, but traders aren’t expecting a large decline. This is a positive for the market if support at 2040 on SPX holds. If it breaks, the market is at risk of a cascade lower due to lack of support below that level and what appears to be a lack of buying in the defensive sectors as the market falls.