Last week I mentioned that my intermediate term indicators strengthened while some short term indicators that I follow were showing weakness. This week I’m seeing the short term indicators right themselves and the intermediate term indicators continue to strengthen. This increases the odds that the market will finally break out of the current range to the upside. Of course, price is truth so 2120 on the S&P 500 index must be decisively broken to the upside (along with the current Dow Theory line breakouts) for confirmation that the next intermediate term trend is underway. One positive indicator comes from support and resistance levels generated from the Twitter stream. Traders are now tweeting higher price targets which indicates they’re putting on bullish trades.

Another positive sign this week is NYSE new highs are rising and new lows are falling as the market gets close to new all time highs. We still want to see new highs break its recent down trend for confirmation that investors are willing to buy shares that are breaking out.

I mentioned earlier in the week that I didn’t see systemic damage even though there were some small warning signs. One of the things I was looking at was the behavior of investors vs traders. Here are a couple of indicators that give clues to investor sentiment. Take a look at the performance of the market (via a short of the S&P 500 index – SH), an actively managed short fund (Active Bear – HDGE), and mid term volatility (VXZ). While the market chopped around over the past few weeks traders were pressing shorts and winning (HDGE). During the same time period investors weren’t aggressively adding mid term protection to their portfolios (VXZ). If you see VXZ start to rise as the market falls it will indicate that investors are getting nervous.

Another thing that indicated the weakness was transitory rather than systemic comes from the number of bearish stocks during the recent consolidation (past two months). The number of bearish stocks on Twitter didn’t rise as the consolidation continued which indicated that investors were buying value instead of dumping low performing stocks. Below is the two month most bearish stocks on Twitter list. It only contains two stocks. For a longer term top to be put in place this list should see an increase as investors become afraid to hold their laggards. You can see the changes in the most bearish list here. You can see the number of bearish stocks in an interactive chart here. Keep an eye on these indicators when the market dips for clues that the decline is likely serious (rather then just a trading opportunity).

Below is a chart with readings for our core market health indicator categories.

Conclusion

The intermediate term health of the market is still intact, but we need a break of the range for confirmation.