As I’ve been highlighting over the past several weeks, 2040 on the S&P 500 Index (SPX) was a crucial support level. It garnered more tweets from market participants than any other level over the past several months. With everyone watching 2040 as support it made it likely that any break of that level would result in increased selling. Last week I warned that on a breach “selling will likely accelerate”. 2040 broke and we got the expected result. I must say that I was surprised by a 3% down day on Friday though.
Price targets from traders on Twitter are now pretty bleak. The largest number of tweets is clustering around the October 2014 low at 1820 on SPX. That would be about a 15% decline from the top. At DownsideHedge I’ve written that the odds of a 10% decline from current levels are high due to a market risk warning when breadth is already poor. With the market down 7.7% already there is an increased likelihood that the decline will ultimately carry to 17.7%…or more.
On Monday I posted on Twitter that the bulls didn’t want to see 7 day momentum and sentiment to turn down from zero. The last occurrence was in early October last year. Sentiment turned down and the result was much the same as last time.
Current reading for momentum on both a daily and 7 day time frame show a pitched battle between the bulls and the bears with the bears winning (obviously). The volume and intensity of tweets was four times the average level on Friday, but the daily print wasn’t extremely bearish. This indicates that there are still a lot of people who believe the top isn’t in yet and that this is a dip to be bought. The strength in daily sentiment is helping 7 day momentum paint a slight positive divergence. Bulls and traders looking to buy a short term bounce want to see a higher low in 7 day momentum associated with the next low in SPX.
The number of bearish stocks on Twitter rose to another three year high this week. The number of bullish stocks is declining. This is causing breadth to fall to the lowest level in almost two years. As long as breadth is above zero I consider the very long term trend to be up.
Sector sentiment showed the most damage to industrials and technology this week. The other leading sectors show a bit of optimism with their bullish readings. I’d like to see the defensive sectors show weakness as a sign that we’re putting in a low.
It looks like there is a bit of downside still ahead. 7 day momentum is below zero, daily sentiment didn’t print an extreme negative reading on a 3% down day, and there’s too much white space below the market on the chart of traders tweets. On the next low the bulls would like to see a good positive divergence in 7 day momentum that is accompanied by weakness in sentiment for the defensive sectors. Those two things should create a tradeable bounce…at the least.