TWTR Update

Several weeks back I had posted a piece on momentum stocks, these have been beaten down pretty bad as the "Percentage of ALL NYSE Stocks Trading 2 Standard Deviations Above their 40-day Moving Average, aka "Momentum Stocks" had dropped significantly.

This is the breadth indicator I just spoke of, the T2 Series, there's no interpretation here, these are real numbers. In green is the "% stocks 2 SDs >40-day M.A." and in red, the SPX-500.

Note that in October momentum stocks were at about 40%, when I posted the "Momentum Stocks" post about 2 weeks ago, that had fallen off to a mere 10%, in other words momentum stocks have taken it on the chin.

I expect a nice move up in momentum stocks, but there were a few things I expected to see first. TWTR is a perfect example for the general idea.

However we have quite a few members interested in TWTR so I thought I'd not only go over a TWTR update, but come back to the general idea of what I'm looking for and when/how momentum stocks should offer an amazing trade (long). 

Note that even after the most recent short squeeze off the May 15th bear flag only lifted this class of stocks from about 10% to just a bit above 16%.

What's important to grasp with the 4 stages of a cycle applied to TWTR (stage = mark-up/rally, stage 3=top/distribution, stage 4= decline and stage 1=base/bottom. The "C" = "Capitulation", basically all weak hands selling at once, generally accompanied by a large gap down and very high volume.

One common misconception about capitulation is that it is the low or bottom and people expect a rally shortly thereafter, this is not typical. Usually after capitulation price will drift lower over a period of several months or so, however it tends to be proportional with the preceding stages, the more charts you look at, the more you get use to estimating the proportions of each stage or event.

After the low is put in, there is a stage 1 base that forms, the size of the base gives you some idea of how far stage 2 / rally can move. I don't think TWTR is putting ion a primary trend base, meaning a new bull market, I do think it is or will put in a base that is significant enough to cause a counter trend rally that might retrace 50-65% of the stage 4 decline. The point of a counter trend rally as you'll see is to change sentiment from bearish to bullish, they are a lot of fun to trade and some of the strongest (in percentage terms) and fastest rallies you'll ever see (while in a primary trend bear market). I'll show an example of this.

Even though TWTR's base is not nearly the size I'd expect before a real counter trend move, it has formed a bull flag and this bull flag does have positive divergences, it also looks like it was specifically constructed, which I'll show you as well as TWTR is a popular trading stock and a flag is a common technical price pattern that even a newbie trader will recognize after reading their first T/A book.

Volume for the flag is right, it should decline in to the flag, which is a parallelogram trading away from the preceding trend (the flag pole) which was up.

Today it looks like we have a breakout from that flag , but even with the divergences, there's something I don't trust here and it's largely centered on the base's size.

The 4 hour 3C chart went negative at the top and then confirmed the downside move, it has NOT put in a positive divergence as of yet.

The 60 min chart shows the same things, but has a small positive divegrence, this is not the size I envisioned when I put out the "Momentum Stocks" post.

 The 15 min chart shows divergences brining TWTR down to what I suspect to be base support and to the far right ids the bull flag ( a bullish consolidation/continuation patter). We know a high percentage of these flags are manipulated in many ways, usually 3C will give a contradicting signal like a bull flag will have a negative divergence and we know to expect some form of fake out, kind of like the mid-May bear flag with positive divergences that led to the short squeeze recently.

Still, this is a pretty respectable positive divergence at the flag and just before the rally that created it. I have little doubt these divergences are part of a larger base, but they also seem to be part of the bull flag.

I have to wonder if tomorrow's ECB policy event which has very high expectations has something to do with today's action.

10 min chart also positive at the bull flag.

The 5 min chart is the one in which the signals are strong enough to cause the moves that they forecast, a negative at 1, a positive at 2 that leads to the flag pole, a negative at 3 that causes the pullback that forms the flag and a smaller positive at 4 in the flag area.

This chart is probably the one that makes me most suspicious of TWTR's ability to maintain a move beyond a short term swing if that. The divergence at #4 should be much larger for a strong breakout from the flag.

 Intraday charts are useful, but you have to remember that they are not showing the same size of underlying accumulation/distribution as the charts above. Again, a negative at the top of the flag pole to create the flag consolidation/pullback and a positive in to the flag pullback/consolidation.

 The 3 min chart shows a positive just before the move up that forms the flag pole and a negative at the top of the pole to form the flag consolidation as well as a positive which again is not that large considering. At this point I have some trouble trusting this move.

I have used the Dow 1929 crash below to show an example of a trend and a counter trend rally and what I expect moving forward for momentum stocks to make for decent longs. Remember, this is probably the worst bear market move of the last century.

From the 1929 break, and you'll notice almost every break of a primary trend turning from bull to bear will be at new highs, just as it was in 2007 or for the NASDAQ in 2000. The following decline lasted 2 months, then we saw a 5 month nearly +50% gain which is a "Counter trend rally". Even though we already know what happened, imagine being a trader back then not knowing what comes next. All you know is you saw a rally of EIGHT YEARS and 500%, during the "Roaring 20's" (which also used Quantitative Easing by the F_E_D before the crash). There was a sharp break that lasted 2 months and then you saw a strong 5 month rally of nearly +50%.

I'd be inclined to think a lot of traders would have assumed the 1929 break was a fluke and the uptrend was resuming. THIS IS THE POINT OF A COUNTER TREND RALLY, THAT'S WHY THEY ARE SO STRONG, THEY HAVE TO BE CONVINCING AND CHANGE SENTIMENT FROM BEARISH TO BULLISH AND 5 MONTHS OF UPTREND AND A +50% GAIN WOULD PROBABLY DO THAT.

This is how Wall St. creates the demand they need to sell in to or short in to as many were likely left holding large long positions as the 1929 crash caught many off guard (by the way, 3C telegraphs distribution on a massive scale at least a year before the 1929 crash).

What does this have to do with TWTR? Well first consider the base size of TWTR, it's not as big as I'd expect for a true counter trend rally that is strong enough to change sentiment, but momentum stocks leading such a counter trend move (by the way there were at least 6 during the bear market from 1929 to the bottom in 1932) bin itself would be psychologically important to selling the counter trend rally.

My expectations...

First I expect a significant break in the market, we even have the F_E_D right now concerned about the lack of any fear in the market as they know they created a monster bubble and the larger it gets, the worse it will be and harder for the F_E_D to manage. John Hilsenrath of the WSJ, the F_E_D's unofficial mouthpiece just put out a column saying the F_E_D was very worried about the lack of fear in the market, it almost sounded as if the F_E_D itself might pop the bubble.

After a significant break, the counter trend move has to be sold to retail traders, it needs to be convincing, it needs to change what would be very bearish sentiment to bullish so there's demand that Wall St. can sell/short in to or just shakeout the shorts. You can't have everyone on the same side of the trade and make money in a zero-sum game, someone has to lose for someone to win and counter trend rallies serve that purpose.

Just using some "rough" eye-balling of TWTR's chart and current base size, I figure by the time an initial break comes and changes sentiment, TWTR's base should be large enough to lead a counter trend rally and that's where I'd want to trade TWTR long and any other momentum names that have put in a similar base (they have to be the ones already beaten up, not the NFLX or PCLNs.).  By the time the counter trend rally (and these are seen in just about EVERY bear market) ends, we should have very good signals and long trades in names like TWTR can be closed out and switched back over to shorts, giving us a great short entry.

It's for this reason as well as those stated above that I'm not quite on board with TWTR, even though it is doing the work. There are a lot of assumptions there, but certain things in the market just repeat because human nature never changes.

We'll keep an eye on TWTR, but I'm not ready to take that risk yet.