Patiently Waiting While Risk Rises

Last week I mentioned that 7 day momentum calculated from Twitter for the S&P 500 Index (SPX) needs to hold above it’s last low to show that the bulls aren’t jumping ship. This week the last low is holding, but just barely. The rising trend of sentiment has been broken and 7 day momentum is now back at a level that would have been considered oversold during the past three years…until recently that is. This puts sentiment at a critical point. If it breaks lower it will signal that the bears are winning the battle for the long term. A turn higher in sentiment would be extremely bullish because it would signify that the last few dips were most likely outliers, rather than a start of a new trend of lower sentiment.

Daily sentiment led price lower on the current decline due to market participants tweeting the the market had run too far too fast. Now we’re getting a dip, but it’s on low volume. This indicates a lack of buyers rather than a big increase in sellers. It seems for now the bulls are content to wait before showing any panic.

Breadth calculated from the Twitter stream shows the bulls holding firm. The number of bullish stocks is holding up which indicates traders are keeping their winners. However, it seems they’re quick to launch their losers. This is the thing that is most concerning at the moment. With the number of bearish stocks close to levels seen just before the market tumbled in August, the odds increase for a sharp decline. On the positive side, overall breadth is still well above zero so the long term trend is still bullish.

Support and resistance levels generated from trader’s price target tweets show uncertainty. Or at the least, sitting on the sidelines. Price targets aren’t leading the market. Instead of tweeting predictions, market participants are tweeting observation of the current price level. One other concern is that there are no tweets below the 2020 level on SPX. The white space on the chart means traders don’t know where support is. This often leads to a waterfall decline if the current support breaks. The bulls want to see several levels of support show up on the twitter stream if 2020 breaks or look out below.

Sector sentiment is mixed. Nothing of importance that I can see.

Conclusion

So far this looks mostly like a normal dip after a strong rally where buyers dry up. It doesn’t look like aggressive selling. However, risk is showing up in several indicators. 7 day momentum is close to diving into deep oversold territory, the number of bearish stocks creates instability, and lack of support below the market can lead to a waterfall decline. The bulls need to take charge soon or it’s likely we’ll revisit the August low.