Good Place For A Bounce

I mentioned last week that I thought the current dip looked more like consolidation than the start of a new downtrend. I was wrong. Oops! That’s what I get for going with the odds that a bull flag generally resolves to the upside. Now what? Let’s go with the odds again. It looks like this is a good place for a bounce. Here’s the evidence I see from several market indicators generated from the Twitter stream.

First, is that 7 day momentum for the S&P 500 Index (SPX) has reached a level that has historically been oversold. Generally when sentiment gets this low the market bounces. If however, we’ve entered a bear market then the lows in 7 day momentum during August and September will likely become the new oversold level (and the recent highs in 7 day momentum will become overbought readings). One thing to note is that a lot of damage was done to sentiment this week. It will take time to convince fearful investors and traders that the worst is behind us.

The second sign that a bounce is due comes from price targets gleaned from the Twitter stream for SPX. The market usually starts to bounce within a few days of substantially lower price targets showing up on the Twitter stream. Thursday and Friday we started getting fearful price tweets as low as 1860 on SPX. Possible support levels for SPX are mostly clustered near the August and September lows (roughly 1865). Resistance that needs to be cleared for a bullish outcome are 2020, 2040, and most importantly 2100.

Another sign the market may bounce soon comes from the sectors. In the past, when every sector was positive it was almost always a short term top. The same condition might apply in reverse…meaning that when every sector is negative it might increase the odds of a short term low. This week didn’t see all sectors negative, but it was close. Only energy had a positive reading. This suggests that amid the carnage investors were picking up the most beaten down sector. Take a look at the list of energy stocks that Trade Followers tracks and you’ll see a lot more stocks with positive 7 day momentum than negative ones.

Breadth calculated between the count of bullish and bearish stocks on Twitter doesn’t hold any clues for the short term, but longer term it is getting close to signalling a bear market. If the number of bearish stocks overwhelms the bullish count then Twitter stock market breadth will turn negative (signalling that we’re in a bear market).

Conclusion

It looks like we’re due for a bounce. 7 day momentum is oversold, fear is showing up in price targets, and almost every sector has negative sentiment. However, due to the amount of damage done to sentiment this week, I suspect that some time will be necessary to alleviate fears and that a rally above 2100 will be necessary to create enough bullishness to take the market to new highs. Short story: choppy market ahead.