Monthly Archives: August 2015

Sentiment Damage

Over the past several weeks I’ve been chronicling the change in sentiment on the Twitter stream as it lead the market lower. In early July sentiment turned from bullish to neutral. By the end of the month sentiment had clearly turned  bearish evidenced by both momentum and the rise in the number of bearish stocks. As the market traded sideways in early August sentiment continued to show mostly bearish readings then made an attempt to rise back above zero. That attempt failed and we watched the S&P 500 Index (SPX) fall hard as market participants panicked.

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The extreme fear and oversold readings in 7 day momentum last week created the conditions necessary for a good size bounce. Now what? Unfortunately, it appears that the volatility last week created a large amount of damage to investor sentiment. The rally out of Tuesday’s lows had little positive effect on daily sentiment. It had trouble getting above zero. This is causing 7 day momentum to continue to confirm a downtrend in price for SPX. 7 day momentum also printed its third oversold reading since the first of July. The latest print created a new low which is confirming the low in price on SPX. These aren’t the conditions I’d like to see after a strong rally and indicate that market participants will likely sell further strength.

Resistance levels gleaned from trader’s tweets suggest that the most likely areas of profit taking (or relief rally selling) will be near 2000, 2040, and 2100 on SPX (if it can make it that far amid the selling). The drop last week created a lot of fear for lower prices. The range below 1865 has a significant number of tweets stretching all the way to 1700, with scattered tweets calling for prices to fall as low as the 1400 to 1425 area on SPX. The wide range between support and resistance suggests that traders (and likely investors) will chase price rather than make committed allocations to the market. As a result, I expect volatility, both up and down, to continue in the near future with support at 1865, 1820, and 1800.

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The strong rally in resource and energy stocks caused the number of bearish stocks on Twitter to fall this week. Unfortunately, many leading names from various industries litter the current list. The number of bullish stocks fell this week, but the count is staying above the January and March lows. Keep an eye on this indicator because any weakness going forward will indicate that selling is starting again in individual names which will likely drag the market lower. You can see the interactive chart of market breadth here.

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Sector sentiment showed mildly positive signs with energy, financials, and technology, showing the highest positive readings. Defensive sectors showed weakness, but so did industrials and basic materials. I like to see positive readings in the latter two sectors to indicate the market is on a firm footing.

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Conclusion

A lot of damage was done to investor psyche this week. Even a strong rally out of the lows couldn’t generate strong positive daily sentiment readings. 7 day momentum is still well below zero and the number of bullish stocks continues to fall. It is likely that market participants will sell further strength. Keep an eye on the number of bullish stocks for the first clue that the market is rolling over again. The reaction at 2000 and 2040 on SPX will also tell us a lot about the conviction of buyers. The bulls want to see consolidation at those levels, not a swift rejection.

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Finally Seeing Some Fear

Last weekend I noted that I wasn’t seeing the extreme levels of bearishness on the Twitter stream for the S&P 500 Index (SPX) that I’d expect with the size of the price decline. As a result, I expected to see a bit more decline before a low was made. Now I’m starting to see some signs of fear and capitulation. As a result, I’m looking for a short term low in the near future. The first sign of capitulation comes from 7 day momentum. It is now painting the most oversold reading in three years.

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The next thing I’m seeing is a lot of tweets calling for lower prices. Traders are now showing some real fear. Price targets for SPX are mostly in a range from 1700 to 1950, with the largest number at 1820. The tweets calling for 1820 come from multiple trading styles. I’m seeing Elliott Wave, trend lines, Fibonacci retracements, the October 2014 lows, etc. as a reason for the price target. The various styles add weight to that level as major support. A lot of buyers will take a chance at that level…but abandon their positions quickly if it can’t hold.

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It is a time to be cautious, because major support (and resistance) levels often act as a magnet. I wouldn’t be surprised to see a quick flush to 1820 if yesterday’s lows break.

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Where Now?

As I’ve been highlighting over the past several weeks, 2040 on the S&P 500 Index (SPX) was a crucial support level. It garnered more tweets from market participants than any other level over the past several months. With everyone watching 2040 as support it made it likely that any break of that level would result in increased selling. Last week I warned that on a breach “selling will likely accelerate”. 2040 broke and we got the expected result. I must say that I was surprised by a 3% down day on Friday though.

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Price targets from traders on Twitter are now pretty bleak. The largest number of tweets is clustering around the October 2014 low at 1820 on SPX. That would be about a 15% decline from the top. At DownsideHedge I’ve written that the odds of a 10% decline from current levels are high due to a market risk warning when breadth is already poor. With the market down 7.7% already there is an increased likelihood that the decline will ultimately carry to 17.7%…or more.

On Monday I posted on Twitter that the bulls didn’t want to see 7 day momentum and sentiment to turn down from zero. The last occurrence was in early October last year. Sentiment turned down and the result was much the same as last time.

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Current reading for momentum on both a daily and 7 day time frame show a pitched battle between the bulls and the bears with the bears winning (obviously). The volume and intensity of tweets was four times the average level on Friday, but the daily print wasn’t extremely bearish. This indicates that there are still a lot of people who believe the top isn’t in yet and that this is a dip to be bought. The strength in daily sentiment is helping 7 day momentum paint a slight positive divergence. Bulls and traders looking to buy a short term bounce want to see a higher low in 7 day momentum associated with the next low in SPX.

The number of bearish stocks on Twitter rose to another three year high this week. The number of bullish stocks is declining. This is causing breadth to fall to the lowest level in almost two years. As long as breadth is above zero I consider the very long term trend to be up.

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Sector sentiment showed the most damage to industrials and technology this week. The other leading sectors show a bit of optimism with their bullish readings. I’d like to see the defensive sectors show weakness as a sign that we’re putting in a low.

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Conclusion

It looks like there is a bit of downside still ahead. 7 day momentum is below zero, daily sentiment didn’t print an extreme negative reading on a 3% down day, and there’s too much white space below the market on the chart of traders tweets. On the next low the bulls would like to see a good positive divergence in 7 day momentum that is accompanied by weakness in sentiment for the defensive sectors. Those two things should create a tradeable bounce…at the least.

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Wait for a Signal

I’ve written before about the importance of discipline in trading. Last September I highlighted why it was important to close a trade if Twitter momentum was failing. This week we had an example of staying disciplined by not entering a long trade until the bulls overwhelm the bears on Twitter. On Monday I posted potential trade setups for emerging markets (EEM) and Freeport McMoRan (FCX). In that post I warned to wait for a buy signal before making a trade. The reason is that we want to wait until it’s clear that many other traders on Twitter are accumulating the stock…then we ride along with them.

Look at the updated charts and you can see that the setups didn’t materialize into a buy signal. Instead, market participants started dumping both stocks and momentum turned down from it’s confirming downtrend line. This indicates that the bears once again beat the bulls at resistance (from sentiment and momentum). As a result, I walk away from the trade and wait for another setup.

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Twitter momentum for the gold miner’s ETF (GDX) did generate a buy signal. You can see the full details here. Now it’s time to manage the trade. Twitter momentum is now painting a confirming uptrend line for GDX. If that line is broken to the downside it’ll be time to close the trade or take some profit depending on your gains and your time horizon. You can follow the links in this post backwards in time to see how we managed a GDX trade at the first of the year. It outlines a road map for a counter trend bounce trade or accumulating long term positions at potential bottoms.

 

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Time for a Bounce in Resource Stocks

I’m starting to see good oversold washouts in sentiment from Twitter for various resource stocks. Many are painting patterns that provide low risk long trades. The first example is a gold miner’s ETF (GDX). 7 day momentum has painted a positive divergence after an oversold reading and has now moved above its confirming down trend line. This creates a buy signal that should be good for a counter trend bounce trade. We use the newly formed uptrend line in 7 day momentum as a trigger to close the trade if momentum breaks back below it. You can see more information on how we use the data in our help pages. Here’s a page with a specific example.

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Freeport McMoRan (FCX) is setting up for a counter trend bounce trade as well. It hasn’t triggered yet. Wait for a signal because the setup may fail if 7 day momentum turns back down. You can follow the FCX chart here.

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Emerging markets (EEM) are also close to signalling a short term move higher. Once again wait for a signal before making a trade. It’s chart can be found here.

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View take a look at the individual charts in the most bearish lists over the last several months and you’ll see more candidates for trades.

Another way to find stocks that have been in uptrends, but are currently consolidating is by looking at the longer term bullish lists (use the 6 month, 9 month, 1 year links). Look for gaps where there aren’t any scores for the stock. An example can be seen at the bottom of this page.

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Waiting For a Reason to Get Bullish

Not a lot has changed from last week’s post on Twitter sentiment for the S&P 500 Index (SPX). Negative sentiment persists, but it’s slowly righting itself. The daily indicator bounced back and forth between mildly positive and mildly negative prints during the week. This caused 7 day momentum to drift slowly higher, but it still hasn’t been able to get above zero. It appears that market participants are waiting for a reason to get bullish.

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The number of bearish stocks on Twitter rose to another three year high last week, but the number of bullish stocks rose as well. This caused breadth to drift sideways in the high thirties. As long as breadth is above zero the long term trend should be up. You can see the interactive chart of breadth here.

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Price targets from traders on Twitter still lack optimism. There were very few higher tweets which indicates a lack of hope. 2040 on SPX is still the must hold level. If it breaks selling will likely accelerate.

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Sector sentiment continues to show caution with the defensive sectors getting the most support from the Twitter stream.

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Conclusion

Market participants have moved back to neutral on 7 day momentum, but are reluctant to tweet higher prices. The high number of bearish stocks is stealing hope as individual portfolios suffer. This has resulted in strength from defensive sectors. In short, people are waiting for a reason to get bullish before committing themselves.

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Persistent Negative Sentiment

Over the past several weeks daily sentiment readings from the Twitter stream for the S&P 500 Index (SPX) have had trouble getting above zero. Negative sentiment persists even on days when the market rallies. Since the first of July the daily indicator has only had one print above the moderate level of +11. This caused a weak response in 7 day momentum during the early July rally. For the last three weeks 7 day momentum has been mired below zero and is currently trying to turn up from the most oversold level in nearly three years.

The volume and intensity of tweets increased 50% above average on Thursday and Friday. This shows a high level of interest from both bulls and bears which often mark inflection points. It usually takes at least five to seven days of extreme intensity to put in a durable low so I suspect we’ll see a bit more selling before that low is made.

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Another sign of persistent negative sentiment comes from the number of bearish stocks. It hit a three year high this week. This caused breadth to fall in the face of a rising number of bullish stocks. The leaders are getting more support and the laggards are being abandoned.

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Support and resistance levels gleaned from Twitter are painting a clear line in the sand at 2040 for SPX. 2020 is a secondary support level. There are almost no tweets for prices above the market so everyone is looking down. This suggests a clear low will need to be made before traders get aggressive on the long side.

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Sector sentiment this week shows market participants moving to safety with high readings for consumer staples. Industrials and technology have the most negative readings. Not a recipe for a strong rally.

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Conclusion

Negative sentiment persists. Daily momentum can’t get above zero, 7 day momentum is near three year lows, the number of bearish stocks continues to grow, and price targets from traders are all lower. With the volume and intensity of tweets just starting to rise the odds favor more volatility before a durable low can be made.

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Waiting Without Hope

Market participants on the Twitter stream are getting cautious while they wait for a break of the range in the S&P 500 Index (SPX) between 2040 and 2140. 7 day momentum and sentiment from Twitter for SPX now has two lows that are the most oversold readings in almost three years. The rally this past week had little impact on sentiment indicating that investors are losing hope. In a healthy market a rally that brings price within 2% of all time highs brings with it strong sentiment readings. We’re less than 2% from all time highs and momentum from Twitter can’t even get above the zero line.

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Price targets from traders on Twitter for SPX have dried up. Our computer system that gathers tweets mentioning price is seeing tweets come after a price has been reached. Traders are sitting on their hands and observing rather than actively trading with an expectation of either higher or lower prices. It appears that they are waiting for a break of the current range between 2040 and 2140.

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Sector sentiment shows investors getting cautious with the defensive sectors showing the highest readings.

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In fact, Consumer staples (XLP) are trying to break higher ahead of SPX. It appears as there is a flight to safety underway.

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Breadth calculated between the most bullish and bearish stocks on Twitter is turning up mostly due to the number bullish stocks rising. However, the number of bearish stocks isn’t falling very fast. This indicates that beaten down stocks aren’t being bought with enthusiasm.

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Conclusion

It appears that market participants are waiting for a break of the range between 2040 and 2140 on SPX without much hope. 7 day momentum won’t turn positive, price targets are lagging price, and defensive stocks show the most support. Added all together we should expect continued chop rather that substantially higher prices.

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