Monthly Archives: January 2016

No Believers

Quick update this week. Market participants who tweet just aren’t believing this rally. Even the strong upside move on Friday couldn’t get daily momentum and sentiment above zero. 7 day momentum is acting sluggish and isn’t responding well to upward price moves. When this occurs it generally means more downside is ahead. Since breadth is negative (next chart below) bear market rules now apply. That means we’ll probably see 7 day momentum peak in the +5 to + 10 area with a lot of failures near the zero line (during a bull market it peaks between +15 and +25). That gives this rally a bit more room to run, but be careful if you’re trading on the long side.

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As mentioned above, breadth calculated between bullish and bearish stocks on Twitter is still negative. That means we’re in a bear market and more long term pain is likely ahead. The number of bearish stocks continues to make new highs as investors lose hope in an increasing number of stocks.

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Trader’s price target tweets continue to show the same pattern. Very few tweets above current prices and continued tweets near previous lows. When price tweets follow price it indicates chasing (and little hope). Not a good condition for a solid rally.

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Conclusion

It appears that there are very few believers that this rally will be sustained. Daily momentum can’t get above zero, 7 day momentum is sluggish, the count of bearish stocks continues to grow, and no one is tweeting higher prices. Be careful because these conditions mean a lack of committed buyers, which often results in swift drops that come out of nowhere.

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Watch the Bounce

The market has finally started to bounce. Now it’s time to watch the nature of the bounce. So far, it looks like we’re going to see a short term rally that is part of a longer term down trend. First to the rally. On Friday, sentiment for the S&P 500 Index (SPX) generated from the Twitter stream printed a strong +21. Readings above +20 on the first day of rally often mark initiation thrusts that have follow through for at least another couple of days. This is in contrast to the rallies out of the August and September lows where daily momentum couldn’t get much above zero. This indicates that traders were ready for a bounce.

Another sign that traders were anticipating a bounce comes from 7 day momentum. It painted a positive divergence with price all week as traders started tweeting about oversold conditions and covering their short positions. Over the next week the bulls want to see continued strong readings from daily momentum. A lack of strong readings will indicate that this is simply a short covering rally and long term buyers aren’t stepping up. You can see the daily updates to this chart here.

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Now to the long term down trend. Our “Market Timing” indicator is a measure of breadth between the number of bullish and bearish stocks on the Twitter stream. The concept is simple; when there are more bullish stocks than bearish we’re in a long term up trend, and when there are more bearish stocks than bullish we’re in a long term down trend. On Tuesday, the breadth indicator dipped below zero for the first time since inception (late 2012). As a result, we made an official bear market call. Notice the strong rally on Friday didn’t reverse any damage done during the decline. In fact, the number of bearish stocks continued to rise and the number of bullish stocks continued to fall. You can see the updates to this chart daily here.

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Support and resistance numbers for SPX gleaned from Twitter show a fairly bleak picture. There is no hope in trader’s tweets, but plenty of fear. This is another indication that we’re merely seeing a short covering rally, rather that new buyers with hope for substantially higher prices. Right now, 1925 on SPX is the most market participants are hoping for. Bulls want to see some tweets with price targets in the 1950 to 2000 range over the next week.

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Sector sentiment isn’t telling us much this week.

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Conclusion

So far, we’ve got a short covering bounce that was expected by market participants. Bulls want to see high daily momentum and sentiment readings plus some higher price targets in tweets. This would indicate new buying is following the short covering. Without it, the bear market will likely reassert itself.

 

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Bear Market

Our breadth indicator dipped below zero yesterday at the close. That means we’re making an official long term bear market call. Until the market can right itself, short trades should be more profitable than long trades. This is a time to be cautious with your portfolio.

Stock Market Timing Signal Bear Trend

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Market at an Inflection Point

I did a post at Downside Hedge that shows several market indicators that are very close to signaling a bear market. The market needs to recover very soon or the long term trend will be changing from bullish to bearish. One of the indicators I highlighted was breadth between bullish and bearish stocks on Twitter. It is sitting at zero right now. A fall below zero will indicate a bear market. Read the full post a Downside Hedge for more info.

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A few charts I didn’t include in the other post are 7 day momentum and intensity. 7 day momentum for the S&P 500 Index (SPX) is turning down from below zero. That’s never a good sign.

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The volume and intensity of tweets is rising to a level that generally marks a short term low. But, if we’re in a bear market that behavior may not generate a significant bounce.

160116SPXintensity

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Good Place for a Bounce

I mentioned last week that I thought the current dip looked more like consolidation than the start of a new downtrend. I was wrong. Oops! That’s what I get for going with the odds that a bull flag generally resolves to the upside. 😉 Now what? Let’s go with the odds again. It looks like this is a good place for a bounce. Here’s the evidence I see from several market indicators generated from the Twitter stream.

First, is that 7 day momentum for the S&P 500 Index (SPX) has reached a level that has historically been oversold. Generally when sentiment gets this low the market bounces. If however, we’ve entered a bear market then the lows in 7 day momentum during August and September will likely become the new oversold level (and the recent highs in 7 day momentum will become overbought readings). One thing to note is that a lot of damage was done to sentiment this week. It will take time to convince fearful investors and traders that the worst is behind us.

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The second sign that a bounce is due comes from price targets gleaned from the Twitter stream for SPX. The market usually starts to bounce within a few days of substantially lower price targets showing up on the Twitter stream. Thursday and Friday we started getting fearful price tweets as low as 1860 on SPX. Possible support levels for SPX are mostly clustered near the August and September lows (roughly 1865). Resistance that needs to be cleared for a bullish outcome are 2020, 2040, and most importantly 2100.

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Another sign the market may bounce soon comes from the sectors. In the past, when every sector was positive it was almost always a short term top. The same condition might apply in reverse…meaning that when every sector is negative it might increase the odds of a short term low. This week didn’t see all sectors negative, but it was close. Only energy had a positive reading. This suggests that amid the carnage investors were picking up the most beaten down sector. Take a look at the list of energy stocks that Trade Followers tracks and you’ll see a lot more stocks with positive 7 day momentum than negative ones.

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Breadth calculated between the count of bullish and bearish stocks on Twitter doesn’t hold any clues for the short term, but longer term it is getting close to signalling a bear market. If the number of bearish stocks overwhelms the bullish count then Twitter stock market breadth will turn negative (signalling that we’re in a bear market).

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Conclusion

It looks like we’re due for a bounce. 7 day momentum is oversold, fear is showing up in price targets, and almost every sector has negative sentiment. However, due to the amount of damage done to sentiment this week, I suspect that some time will be necessary to alleviate fears and that a rally above 2100 will be necessary to create enough bullishness to take the market to new highs. Short story: choppy market ahead.

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Looks Like Consolidation

At the moment, the current dip in the S&P 500 Index (SPX) looks more like consolidation than the start of something larger. The first sign comes from 7 day momentum. It’s moving back and forth across the zero line, but not getting extremely over bought or extremely oversold. The range on 7 day momentum is a bit wider than I’d like to see, but for now I’m considering it a constructive pattern. To add weight to the pattern the price of SPX is painting a bullish flag that generally resolves to the upside.

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Breadth calculated between the number of bullish and bearish stocks is moving sideways again. This is due to both bearish and bullish counts falling. What the bulls want to see is the number of bullish stocks start to rise similar to the way it did during last January’s consolidation. What the bears want to see is a repeat of the July pattern where the bullish count fell and the bearish count rose.

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Support and resistance levels generated from the Twitter stream for SPX show a hard barrier at 2100 and light support at 2040, 2030, and 2020. I suspect the market needs a push above 2100 before any sustained buying can occur.

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Conclusion

I’m seeing signs of consolidation, rather than the start of a down trend. The important thing to watch going forward is the count of bullish stocks. If it can start to rise it should be a sign that the consolidation is ending.

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