Last week I suspected that the market wasn’t out of the woods yet due to several factors. Chief among them was a warning from our sector sentiment readings. They indicated that market participants were rotating to safety as the market rallied. Every time all sectors were positive since we’ve been tracking them has resulted in a short term top within two weeks. On this occurrence the top came the next day. This past week sector sentiment was decidedly bearish with large negative readings from basic materials, industrials, and technology, while the defensive sectors had moderately positive prints. Leading sectors were being sold and defensive sectors were still being bought.

Our breadth indicators are falling, but it isn’t due to a lack of strong stocks. In fact, last week saw a slight increase in the number of stocks on the bullish list even though the market fell. The weakness comes from a fairly large increase in the number of bearish stocks. The underlying numbers paint a picture of investors getting much more selective. At the same time they’re more willing to sell on any bad news.

Our momentum indicators generated from Twitter and StockTwits for  the S&P 500 Index (SPY) weren’t damaged much by last week’s decline in price. However, they weren’t inspired by the rally the week before either. That leaves them with tepid readings that are indicative of traders sitting on their hands and waiting.

Another sign traders are waiting comes from support and resistance levels gleaned from the Twitter stream. The vast majority of tweets last week projected price inside the recent range between 1990 and 2065. Even though we’re sitting near the low end of the range there aren’t a lot of tweets for lower prices. This makes the current range extremely important. If the current range breaks lower, support comes at 1975, 1955, and 1910 on SPX. Current resistance is 2000, 2020, and 2065.

Bottom line, market participants are waiting for a break of the current range, but getting defensive while they wait. Defensive sectors are still being bought, the bearish stock list is growing, momentum is tepid, and price targets from traders are mostly in the current price range. That leaves us waiting to see how our indicators react to a break of the range.

If the market breaks lower watch the bullish lists to see if the leaders are being toppled as an indication of a probable correction. Watch the bearish lists and momentum if the market rallies back to the top of the range. We want to see some risk taking (stocks falling off the bearish lists) and enthusiasm for higher prices from momentum.