Earlier in the week I mentioned that there is a bit of chasing going on in the indexes. When this happens it usually means larger range days and increased instability. In addition, price can change direction very quickly. When market participants are chasing it’s a good time to use caution and/or avoid new trades. I prefer to wait until the Twitter and StockTwits momentum charts settle out before getting aggressive again.
When I see chasing in one of the indexes I take a look at the momentum charts for all the other indexes to see if any of them show a more “rational” pattern. Normally the ETFs are more volatile than the index symbols themselves. The reason for this is traders more often tweet the ETF symbol while longer term investors refer to the index in their tweets. By looking at the index we can get a longer term look at sentiment during this choppy period.
Take a look at the momentum chart for QQQ (Nasdaq 100 ETF) below. It shows traders chased the last rally and sold it quickly.
Meanwhile the chart for the Nasdaq 100 index (NDX) is showing continued doubt and a lack of commitment by longer term investors and money managers. This makes it the most important chart to watch at the moment for clues to the general market. If 7 day momentum can break its current down trend line it will increase the odds that price will move back to the recent highs. A failure of momentum to break higher would suggest that more downside is ahead.
Another thing to watch for clues are the leading and/or largest individual stocks in the indexes. Subscribers should be able to find several examples of stocks where their 7 day momentum is compressing or painting a clear trend. Watch which way the stocks break their momentum patterns as an indication of which way the market will go. You can look at this post for examples of momentum breaks in several indexes in early December 2014.