Monthly Archives: June 2015

Nasdaq 100 Downward Initiation Thrust

The Nasdaq 100 ETF (QQQ) has painted two downward initiation thrusts over the past month. Both of them came from sentiment highs on 7 day momentum. This is an unusual situation. Generally 7 day momentum declines as traders take profit on positions moving into a top. Then as the top is being made in price daily momentum records a strong negative print which corresponds with the initiation of a steeper decline. The current situation indicates traders were taken by surprise. They had an expectation of the market moving higher when Micron (MU) reported a miss. The downward initiation thrusts near sentiment highs indicate how quickly traders are to abandon positions. In short, chasing which leads to instability. You can see the interactive chart of QQQ sentiment from Twitter here.

Twitter Sentiment for Nasdaq 100 - QQQ

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Perfect Storm

This coming week it’s going to be all about Greece. Unfortunately, the Greek drama comes amid a perfect storm of sentiment for the S&P 500 Index (SPX). Daily momentum calculated from Twitter for SPX continues to show chasing on very small moves in price. When SPX moves up daily momentum has extremely high prints and any down move creates larger than average negative prints. This is causing 7 day momentum to move from oversold to overbought with very little movement in price. It is now turning down from an overbought level that generally results in a few weeks of choppiness or decline in the market.

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Price targets tweeted by traders have dried up. Almost no one is tweeting prices outside the daily range. This indicates that traders are uncertain and waiting for a resolution…usually of the current range, but most likely the Greece situation at present. One very troubling sign is the lack of support levels tweeted by traders. This condition creates instability because it indicates traders are uncertain about how far a decline will carry.

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Breadth and sector sentiment indicate market participants are viewing this as a risk event rather than a structural or fundamental problem. I find this interesting (and ironic) given the fact that the structure of the European Union is what is at risk….a very fundamental problem. Nevertheless, breadth is showing an increase in the number of bullish stocks and a decrease in the number of bearish stocks. This indicates the long term trend is still up.

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Sector sentiment is also fundamentally healthy with leading sectors showing the most positive readings.

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Conclusion

Greece is currently being seen as a risk event that isn’t changing fundamental behavior by market participants. Unfortunately, this risk event is occurring amid uncertainty and instability in various measures of sentiment…which creates a perfect storm.

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Misc Observations

Here’s a few things I find interesting about the current market. First, the Nasdaq 100 (NDX or QQQ) made a significant short term low about three months ago. Since that time it has retraced that low back to new highs with Twitter momentum confirming the move.

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Over that same time period the stocks that were the most bullish on Twitter come mostly from Health Care, Technology, and Finance. You can see the full list here.

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Twitter (TWTR) continues its downtrend, but sentiment and momentum from the Twitter stream for the stock isn’t even dipping below zero, let alone getting to oversold levels. I suspect TWTR 7 day momentum will need to dip below zero before the lows are in.

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Silver (SLV) is an example of an ETF that shows a wash out in sentiment that is now turning back up. This increases the likelihood of a short term rally.

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Path of Least Resistance is Up

On May 25th sentiment from Twitter finance was calling for a short term top or choppy markets. Last Thursday that condition was cleared with 7 day momentum on Twitter for the S&P 500 Index (SPX) breaking above its confirming down trend line after painting a triangle that lasted more than three weeks. Triangle patterns in 7 day momentum represent a  battle between bulls and bears that is compressing like a spring. When they break the odds for the next market move tilts in favor of the direction of the trend line break. In this instance it was up and as a result the path of least resistance for SPX is up. Of course, Greece could change things, but at this moment Twitter sentiment is expecting a move back to the old highs with a little hope for new highs.

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The hope comes from support and resistance levels gleaned from trader’s tweets. We’re starting to see more calls for 2140 and 2150 on SPX. There is a strong level of support between the 2065 and 2070 area.

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Breadth between the most bullish and bearish stocks on Twitter continues to be healthy. This indicates the long term direction is still up.

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The only fly in the ointment this week comes from sector sentiment that shows some favor for the defensive stocks as the market is rising. If this trend continues it will indicate investors are getting more cautious.

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Overall the odds favor higher prices. We have a new confirming uptrend line in 7 day momentum, traders are starting to tweet higher prices again, and breadth continues to be healthy. You can track Twitter sentiment for the S&P 500 Index during the week with this interactive chart.

 

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Dancing Close to the Door

Over the past two months while the S&P 500 Index (SPX) has been grinding sideways to higher momentum and sentiment from Twitter finance has produced several extreme negative daily prints (below -20). This is a very unusual condition so close to new highs. A series of extreme negative prints is generally associated with a protracted decline. The last string of deep negative readings was near the lows in June of 2010 after the market had declined 10% over a span of two months. The current readings suggest that market participants are very skittish. It doesn’t take much price deterioration to bring out the bears.

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The recent weakness has caused 7 day Twitter momentum for SPX to stall. It has a confirming uptrend line that is six weeks long, but now has a three week short term down trend line in place. The triangle created by the two trend lines shows a building of pressure between the bulls and the bears. When it breaks (either up or down) it will likely point the next intermediate trend for the market.

Support and resistance numbers gleaned from the Twitter stream for SPX indicate that traders are still indecisive and waiting for a reason to deploy cash or sell. Last week saw almost no tweets calling for higher prices. The tweets for lower prices clustered in a range between 2065 and 2085, which are the last few recent lows in the market. When the support and resistance range tightens it suggest market participants are waiting for the current range to be broken before taking action. The range has support at 2065 and resistance at 2120 for SPX.

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Sector sentiment is still showing a fairly positive bias in the leading sectors.

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Breadth between bullish and bearish stocks is also still healthy, but has seen a deterioration in the number of bullish stocks over the past month.

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Overall sentiment from Twitter shows market participants dancing close to the door. They’re waiting for a break of the current range before taking action. Watch for a break of the triangle in 7 day momentum for SPX as it will likely point the next direction. You can see an interactive chart here.

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Patiently Waiting

Two weeks ago the Twitter stream was warning of a short term top in the market. Today it appears that market participants are waiting patiently as the market declines. The daily prints for Twitter momentum and sentiment have been moderate lately. This indicates the chasing I was seeing has slowed. As the chasing slowed the volume and intensity of tweets has started to increase a bit. This generally occurs at a time of uncertainty. If the intensity continues to rise it will indicate fear is starting to rise.

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Last week the market fell to our minor support level of 2085 on the S&P 500 index (SPX). This level held, but is being retested again today. There are virtually no tweets calling for prices below 2085 so if it breaks the 2040 area comes back into play. One thing of note is that there were also very few tweets calling for higher prices either. This is a sign that traders are uncertain and are sitting instead of taking action.

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Breadth calculated between bullish and bearish stocks continues to print healthy long term readings. Last week the number bullish stocks increased and the number of bearish stocks decreased even as the market declined. This suggests some buying is occurring under the covers.

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Sector sentiment is also painting a healthy picture with leading sectors positive and defensive ones negative.

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Overall sentiment from Twitter is showing signs of waiting as evidenced by moderate prints on daily momentum and very few tweets outside the current range. The waiting is occurring with a healthy backdrop from breadth and sentiment.

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