Every day that goes buy I’m more surprised by this rally. But, it’s getting close to crunch time. Now it looks like the market is preparing to make a violent move (not that the 14% rally over the past six weeks hasn’t been violent). The question is, which direction? Take a look at 7 day momentum for the S&P 500 Index (SPX). It has been consolidating in an extremely tight range for the past six weeks. This is not normal behavior. Usually we get a pretty good trend or wide sideways consolidation that is correlated with price. The tight consolidation below zero while the market surges higher indicates traders don’t like this rally. They’re adding shorts and sticking to their bearish bias. If 7 day momentum breaks higher it will indicate that traders are covering shorts and likely result in chasing prices higher. If 7 day momentum breaks lower the bears will be vindicated and will likely press their shorts, while the bulls will turn fearful and take profit on recent gains. Either way, the move in price should be swift.
Another sign that we’re approaching crunch time comes from the number of bullish stocks compared to price on SPX. The bullish count is back to the levels of the last rally while price is approaching its down trend line. The bulls want to see a surge in the bullish count as the down trend in price is broken. The bears want to see the market turn over near the trend line, while at the same time, the bullish count drops rapidly and bearish stocks rise (similar to the late June to late July 2015 period that resulted in a waterfall decline).
Support and resistance levels are still very wide. This is a sign of fear and indecision. The lack of tweets below the market is concerning because waterfall declines occur when no one is tweeting support near current prices. 2100 appears to be the level that will bring chasers into the market if it can be eclipsed.
Sector sentiment is mostly positive this week, which indicates renewed buying, but without overbought readings.
It’s crunch time. Sentiment is coiling in a tight range below zero. When it breaks there will likely be a violent move in price in the same direction. Hold on tight.