Chasing and Uncertainty

By | September 21, 2014

The Trade Followers momentum indicators for the S&P 500 Index (SPX) are showing uncertainty from market participants. The pattern currently being painted by 7 day momentum is usually indicative of traders chasing price. The consolidation and small dip in price over the past few weeks caused momentum to drop rapidly, then when the market recovered momentum shot upward. This behavior shows market participants are reacting rather than planning and executing. This puts some instability into the market as any change in news will cause swift changes in sentiment.

In mid August the indicators showed extreme overbought conditions for SPX. That has now been resolved, but no clear direction has been established yet. This is another sign of uncertainty by members of the Twitter and StockTwits communities.

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Small cap stocks continue to under perform the general market, but are providing more guidance than SPX. The Russell 2000 index ETF (IWM) is currently painting a triangle in price and momentum on Twitter. The next direction of the market will likely be shown by which side of the triangle is violated.

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Breadth continues to drift lower from high levels indicating that market participants are getting more selective in their purchases and also finding some short opportunities.

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Support and resistance levels captured from the Twitter stream are generally positive with traders tweeting 2020, 2040, and 2050 as likely targets for SPX. The 2020 resistance level that has been in place since late August was reached this week and the market immediately pulled back. Support comes in at 2000 and the recent lows near 1980.

Strength from the sector ETFs show a rotation to Financials and Health Care. This is consistent with what I’m seeing when I look at the aggregated relative strength scores from individual stocks. Keep an eye on those sectors as they’ll need to continue to rally for the market to move higher.

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Overall social media signals are showing hope for higher prices with some underlying nervousness from market participants. Small cap stocks, financials, and health care will most likely point the next direction so use them as your guide.

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