Counter Trend Bounce Soon

By | February 14, 2016

I’m seeing a few signs that we’re close to getting a counter trend bounce in the S&P 500 Index (SPX). The most compelling sign comes from stock market sector sentiment generated from the Twitter stream. In bull markets when every sector was positive on a weekly basis it almost always marked short term tops. We’re now in a bear market and all sectors are negative. I view this as a capitulation of sorts, where traders and investors are selling everything. This is the first time since we’ve been collecting the data that I’ve seen this condition, but the track record of all positive sectors in a bull market gives some credence to the current condition being short term bullish.

160214sectors

The number bullish stocks on Twitter continues to tick up slightly even as the market puts in lower lows. This is a sign that some value buying is occurring under the surface. Value buying can cause a short covering rally if it pushes the price of beaten down stocks up enough. Keep an eye on the number of bullish stocks going forward. If it can make a strong move to the upside we should get a decent bear market bounce. You can see the daily updates here. One other thing of note in the breadth chart is that the count of bearish stocks is in a relentless uptrend. It barely dipped during the last counter trend bounce, which indicated that market participants were selling into that bounce. Another thing to watch going forward is of course the breadth line itself. It is still below zero, which signals we’re in a long term bear market. As a side note, Dow Theory signaled a bear market last Thursday. I love it when several indicators tell the same story because it makes it much easier to set aside bias.

160214breadth

The daily and 7 day momentum reading from Twitter for SPX are also signaling that we’re in a bear market. Notice that during bull markets the daily indicator prints mostly above zero with only small dips below. Now it is printing mostly below zero with intermittent positive readings. In addition, 7 day momentum and sentiment is dipping to much lower levels before becoming oversold (and peaking at much lower levels). This week, 7 day momentum gave a -16 print which is fairly oversold, but I consider -20 extremely oversold and the place we’re likely to see sustainable bounces to start.  A break of the confirming downtrend in 7 day momentum would signal the counter trend bounce is underway. You can see daily updates to the chart here.

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Support and resistance from traders tweets for SPX once again shows no hope for higher prices. However, a good cluster of support is building between 1810 and 1780 on SPX. There is another line of support at 1750. If we continue down this coming week, those are likely levels to expect small bounces.

160214spxSR

Conclusion

We’re in a long term bear market, but getting some signs that we’re close to a counter trend rally. Sector sentiment shows capitulation, some value buying is occurring, and 7 day momentum is approaching extreme oversold levels. Watch the number of bullish and bearish stocks on any rally to see if people are buying or selling into it.

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