Weak Response to Rally

By | January 25, 2015

Last week’s rally didn’t inspire market participants on either StockTwits or Twitter. Thursday brought a strong daily print in momentum for the S&P 500 Index (SPX), but the readings from the rest of the week were fairly tepid. This indicates that traders and investors are wary at the moment. Uncertainty still reigns as evidenced from several signs. First is that the StockTwits stream put in a higher low in 7 day momentum while the Twitter stream did not. Next, the tepid readings during the short term rally suggests that even if the market makes new highs 7 day momentum will almost certainly paint a negative divergence with price.

Subscribers should keep a close eye on 7 day momentum next week. If the market rallies you want to see some strong confirmation rather than a negative divergence. A negative divergence will indicate that traders are taking profit and investors aren’t committing new funds. The daily indicator should print higher than 25 on a move above 2075 on SPX. If the newly created uptrend line in StockTwits momentum is broken to the downside then odds will favor a move below recent lows.

150124spx

Breadth from the Twitter and StockTwits streams broke below the October lows last week. It did so with price on SPX 9% higher. It indicates that the leaders out of the October low aren’t being bought aggressively. This is a warning sign that a longer term top may be near (or already behind) us. At the least, short term caution is advised until breadth recovers the January highs. This is something to watch, but until breadth breaks below zero we have to assume the long term trend is still up…and any further weakness should be a buy the dip opportunity.

150124breadth

Support and resistance levels for SPX are in an extremely tight range near term which indicates uncertainty. Traders aren’t projecting price targets above or below current levels in any real volume. They are simply following price while waiting for a break of the wide range between 1975 and 2100. The range is probably the most important thing to watch over the next few weeks. A break in either direction will most likely start a new intermediate term trend.

150125spxSR

Sector strength and sentiment are warning this week with all sectors, defensive included, showing strength. Every time this has occurred since we’ve been tracking it has marked a short term top within two weeks. It indicates that the defensive sectors are being bought as the market rallies. Rotation alone can create a short term top and all out defensiveness can create an intermediate term top.

150225sectorsentiment

Overall sentiment from social media suggests that we’re not quite out of the woods yet. Traders aren’t tweeting higher prices, breadth indicates that leaders aren’t being bought aggressively, a hold at recent lows and a rally aren’t inspiring high daily readings in momentum, and defensive sectors are being bought as the market rallies. A break to new highs in price needs to be accompanied by strong readings from momentum. A break below the newly formed uptrend line in StockTwits momentum will tilt the odds in favor of a break in the December low in SPX.

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