Twitter is Turning into a Shockingly Powerful Trading Tool

I’ve been trading for more than 30 years. I thought I’d seen and been through it all.

But nothing like this…

I collect millions of data points each day in my database. I live, eat, sleep, and breathe data. I sprinkle data on my Corn Flakes in the morning. Naturally, this data goes into my best models, like Best in Breed, Trend Multiplier, and of course, Night Trader.

But I’ve never before thought to quantify a single tweet – a tweet from a certain highly watched Twitter account, that is.

After this week in the markets, I’m thinking about it.

So last night, after markets closed and I blasted an alert to my Night Trader subscribers, I got on the phone with our research department.

We’re devising a way to quantify the value – in terms of movement on the S&P 500 – of a single tweet.

Confession: I never really used Twitter Inc.’s (NYSE: TWTR) insanely popular “microblogging” platform. Sure, I opened an account back when it was all the rage, but I quickly found that it was just too much work for me to broadcast information that most people didn’t care to read. My rule: If it’s important enough, I’ll call you, or you’ll call me.

But now, Twitter has become part of my daily life. Ugh!

That’s what this market has been reduced to. Watching for a tweet that could swing the market one way or another – usually as traders overreact to the content of those micro messages.

This week, things started to change though, as the power of the tweet appears to be wearing thin among some traders. I’m noticing that the market is starting to use the Twitter “bump” to sell into strength.

Frankly, it’s turning into a great tool for traders.

You see, most of the information contained in these messages aren’t worthy of moving the market, but it moves on the hope that something will materialize.

You know what would move the market up? A signed trade deal with China. If the pundits are right, we’re not likely to get that anytime soon.

So, what do we have to look at then? I live by the market’s technicals and sentiment for a reason: They don’t often fail.

Let’s look at a few of these…

Technicals: The S&P 500 is back below its 50-day moving average again. Making it worse, the 50-day acted as staunch resistance twice in the last two weeks. This tells us that the technical traders – you know, those traders selling into the “tweet bump” are really in charge of this market. That’s good because it gives us something to watch that is an effective indication of what the market is going to do.

The Russell 2000 is also back below its 50- and 200-day moving averages again. The risk-off trade remains OFF.

The Dow? Yeah, it’s back below its 50-day and just bounced back above its 200-day trend line today. This isn’t good.

In addition, my Trend Multiplier model is indicating that the 50-day on all three of these are moving into bearish patterns. This means that the market is neutral at best.

The VIX has been bouncing around the 20-24 range this week like a little rubber ball in the trunk of a car. Things are settling down a bit today, but a few closes below 18 are needed before we can start adding many bullish positions.

My Stock Market Matrix has shifted into the neutral-to-bearish zone, indicating that a little more deterioration in the conditions will put us in a straight up short-term bear market.

This will warrant more protective puts and some patience until further notice… which perhaps we’ll get when Twitter lights up again…

— Chris Johnson

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Source: Money Morning