Courtesy of Doug Short.
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The Trade Followers Momentum indicator for the S&P 500 Index (SPX) issued a consolidation warning on 7/11/14. That warning is still in effect. During the past week the indicator was turned back at its down trend line that had given the first indication that the market may experience some choppiness. In order to clear the consolidation warning momentum will need to rise above that down trend line.
Currently a small positive divergence is in place from both Twitter and StockTwits and momentum is barely below zero. This is an encouraging sign given the sharp decline in price on Thursday and continued weakness on Friday. However, the indicators are below zero and any move that takes them below their previous lows will signal continued weakness ahead.
Momentum from small cap stocks (IWM) is compressing in a triangle which suggests that traders on Twitter and StockTwits are split between buying this dip and pressing short trades hoping to break the May lows in price. A break of those lows that is confirmed by momentum breaking its downtrend line will warn that the market may accelerate lower.
Breadth from Twitter and StockTwits (calculated from the stock with the most support and those with the least) continues to move lower. This indicates that market participants are finding fewer stocks they like and more short opportunities.
Support and resistance levels gleaned from the Twitter stream showed a bit of fear from traders. Calls for 2000 on SPX dried up while tweets for lower prices increased. The most tweeted levels below the market were 1925, 1910, and 1850 making them support. Resistance comes at 1955 and the recent highs near 1990.
Sectors showed across the board weakness from the Twitter stream. Technology was the only sector to show any strength. This indicates that selling was widespread last week giving investors no place to hide. This is a negative for the market because it shows a lack of willingness to own any stocks, including the defensive sectors.
Overall indications from social media suggest the worst isn’t behind us yet. Twitter momentum is still on a consolidation warning, breadth is declining, traders are tweeting mostly lower prices, and the sectors show a fear to own almost any stocks. There is a bit of hope with a positive divergence for SPX and a compressing triangle for IWM. If that triangle breaks higher it will create a long signal for small cap stocks and most likely be a positive for the general market.
Blair Jensen is president of Trade Followers. The Trade Followers algorithm quantifies social media and creates stock market indicators that track the momentum of the crowd on Twitter and StockTwits.
