Short Term Caution Signs

By | August 30, 2014

Our Twitter and StockTwits momentum indicators for the S&P 500 Index (SPX) are mostly positive, but showing some short term caution signs. Seven day momentum reached extremely overbought territory last week and has now turned over. Previous peaks of high magnitude have led short term tops in the market by roughly a week or two. The peaks are often associated with sideways or slightly upward action in SPX that ultimately ends with a short term drop in price. This is the first indication of caution, however, it doesn’t imply a large consolidation in price…yet.

140830spx

Breadth calculated between the strongest and most bullish stocks on social media compared to the weakest and most bearish continue to paint high readings and have mostly cleared their negative divergences. This indicator is a longer term measure of market health and suggests that the market will continue to move higher over the intermediate term due to the large number of stocks traders find attractive.

140830breadth

Support and resistance levels for SPX gleaned from traders tweets continue to target 2000, 2030, and 2050 as resistance. Traders are mostly tweeting higher prices which suggests they believe the market will move higher. Support is at 1955 and 1905. However, the 1955 level is not as active as the 1905 area. As a result, there is a lot of white space for the market to fall into if a decline starts from here. This adds some instability to the market.

Another sign of instability creeping into the market comes from social media momentum for volatility (VIX). After painting a series of lower highs, momentum from both StockTwits and Twitter are breaking above very long term down trend lines. This suggests traders are getting somewhat skittish and might be dancing close to the door.

140830vix

Sector strength is showing support for every sector. In the past, this condition has almost always marked short term tops. It shows market participants rotating to safety which often causes choppiness in the market.

140830sectors

Overall momentum is still indicating higher prices in the intermediate term, but showing some caution signs near term. Rotation to safety and a fall from over bought readings on 7 day momentum suggest the market needs more time to digest recent gains. The action of these indicators is what I’ll be watching most closely over the next few weeks.

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