Cracks in the Dam

By | August 6, 2017

Two weeks ago, I mentioned that sector sentiment calculated from the Twitter stream was overbought. When this occurs a short term top is usually in place within a few weeks (almost always in one week). When it stretches to two weeks, sector sentiment stays overbought during the period. We’ve now gone two full weeks from that warning. During that time, the S&P 500 Index (SPX) has traded sideways, but no top has formed. Coincidentally, (or not – since the indicator is a good one) sector sentiment has been overbought now for three weeks. Here’s the chart as of last Friday:

Below is the previous week’s chart. Three full weeks of overbought sector sentiment is warning that a short term top should show itself soon.

 

Sentiment from Twitter for SPX is breaking its confirming uptrend line. It needs to hold right here or the short term top will materialize quickly.

 

Breadth calculated between the most bullish and bearish stocks on Twitter is starting to fall as a result of an uptick in the bearish count. This indicates traders are finding shorting opportunities. This isn’t a good sign near a market top.

 

Support and resistance levels gleaned from Twitter are telling us traders are watching the last lows near 2460 before getting concerned. That level and 2450 are most hold areas for the bulls.

 

Conclusion

There are some cracks in the dam. Sector sentiment has been overbought for three full weeks, 7 day sentiment for SPX is breaking its uptrend, and the count of bearish stocks is rising. Expect a short term top very soon.

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