Chasing Continues

By | January 11, 2015

The Trade Followers Momentum indicator for the S&P 500 Index (SPX) continues to show chasing by market participants. Traders are jumping quickly from one side of the market to the other as price moves in large daily swings. The chasing increases instability because traders are not committed to positions. This shows up as Twitter and StockTwits 7 day momentum painting a pattern that mirrors price. This indicator is suggesting caution is warranted.

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When market participants are committed to positions 7 day momentum paints a clear trend that lasts several weeks. Since the October lows small capitalization stocks (IWM) have had consistent support from both the Twitter and StockTwits streams. Momentum is holding a confirming uptrend line which favors higher prices as long as the trend isn’t broken. This also indicates that small caps will likely outperform if SPX moves higher.

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Momentum for the NASDAQ 100 Index (NDX) has been painting a negative divergence with price that started with a break to higher prices back in early September 2014. It is currently back up against the down trend line. A break above that level will suggest a continuation of the rally and likely new highs for the index.

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Support and resistance levels gleaned from the Twitter stream show a solid area of resistance near 2100 on the S&P 500 Index (SPX). There are scattered levels of support near 2020, 2000, and 1975 on SPX. Below that is white space. When traders aren’t tweeting lower prices it indicates a belief that the market will rally. Unfortunately, it also creates a dangerous condition where a break below support often cascades lower. The same condition existed in early October and resulted in a swift decline.

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Breadth calculated between the strongest stocks and the weakest stocks on Twitter and StockTwits spiked higher this week. The spike was a result of a large number of stocks leaving the weak list. The number of stocks on the most bullish list is still quite small in comparison to readings from recent months. This indicates that the current bounce is likely short covering or bargain hunting, rather than a commitment to new highs for the strongest stocks.

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Sector sentiment is mixed with both defensive and leading sectors showing strength. At the same time leading sectors and defensive are both showing weakness as well. This increases the odds of a choppy market as market participants rotate money between sectors.

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Overall sentiment from the Twitter stream suggests more chop before new highs can be achieved. SPX shows chasing, breadth shows short covering, sectors show rotation. All of these indicate poor market conditions. The lack of support levels below 2000 on SPX increase the danger of a steep decline if that level does not hold. Keep an eye on the trend of momentum for IWM and NDX. A break higher for NDX will suggest new highs are ahead, while a break lower in momentum for IWM will almost certainly be followed by a quick decline in all indexes.

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