Courtesy of Doug Short.
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The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) stayed in negative territory all of last week. Even the 19 point rally in SPX on Wednesday couldn’t push the daily indicator positive. A large number of traders just don’t trust this market and are looking for price points to short rather than adding longs. Over the past week the volume and intensity of language in tweets has risen substantially. On Thursday our daily indicator recorded its highest volume and intensity level ever. That day the market closed flat and the daily indicator came in at nearly zero. The bulls and bears are engaged in a battle royal. When the winner emerges, we suspect it will be with a large move in price.
Currently the bears have the sentiment advantage, but the bulls continue to press the price advantage. Sentiment gave its first warning on January 29th, but the bears haven’t been able to keep price down. We’ve had two negative initiation thrusts that haven’t resulted in price falling over the next several days. This tells us that many market participants are skittish, but others are buying into any weakness or panic.
Twitter support and resistance levels expanded last week with Monday bringing a few calls for 1450 on SPX. The rally on Wednesday brought renewed calls for 1550 above the market. We mentioned in our previous sentiment update that the market would “experience some headwinds and short selling if it gets into the 1525 or 1530 area” on SPX. This coming week we expect more of the same. However, a break above that level will be met with short covering, which could quickly take SPX to 1550. Our current support levels are 1500, 1470, and 1450. Our resistance levels are 1525 to 1530 and 1550.
We’ve added a Twitter Sentiment Sector Rotation chart to Downside Hedge. It is currently suggesting that the market could move higher. Over the past few weeks it has moved away from its bearish reading where technology, basic materials, and industrials were out of favor and the defensive sectors were showing positive sentiment readings. Currently, the defensive sectors are showing sentiment weakness and all others except for Consumer Discretionary stocks are showing strength.
Daily sentiment continues to paint lower highs and smoothed sentiment continues to warn of a possible turn in the market. Smoothed sentiment is still below its downtrend line and still below zero. Intensity is rising, which gives another indication that the market may turn lower. We suspect that we’ll continue to see choppy price action until the current range is broken. Traders now have two well defined price points to trade against with 1530 above the market and 1485 below. Even though sentiment is suggesting that the market should turn lower, we believe the best course of action for the short term is to wait for a break of the current range.
Note: I have created a download page so readers can load the sentiment indicator into their own chart packages. It’s located here.
Note from dshort: Here is a YouTube video in which Blair gives an explanation of the indicator and examples of how he used it in his posts over the last several weeks.
For additional background information on this indicator, see Gauging Investor Sentiment with Twitter.
Blair Jensen at Downside Hedge tracks Twitter sentiment and provides hedging strategies for individual investors.
