Courtesy of Doug Short.
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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) cleared its consolidation warning after just a few days of selling and a subsequent bounce. The break above 1575 on Wednesday brought with it enough bullish sentiment to generate a positive initiation thrust on the daily indicator. Bullish tweets were cheering the move to new all time highs and bears were conceding the point.
Wednesday’s break higher brought with it a high volume and intensity, which is a change from the recent pattern where down days have generated high intensity and up days were quiet. Now that bullish days are showing some intensity, we may have an indication that the bears have finally thrown in the towel. If the market continues to show this pattern we believe it will be positive.
Smoothed sentiment now has a good confirming trend line that corresponds to the last two lows in price. It is above zero and has cleared its consolidation warning by moving back above the negatively diverging down trend line. There is still a good amount of bearish sentiment in the Twitter stream, but the bulls are overwhelming it. This shows our sentiment indicator confirming the uptrend. We find it interesting to note that Jason Goepfert of SentimenTrader pointed out this week that “The percentage of bulls among individual investors has dropped to the lowest level since March 2009.” This highlights the difference between Twitter sentiment and survey sentiment. Survey sentiment acts as a contrary indicator while Twitter sentiment confirms the trend and can warn of consolidation or changes in trend.
Twitter support and resistance tightened significantly this week. Once SPX cleared 1575 the tweets for anything below that general area stopped. Even Friday’s downside action didn’t generate predictions for prices below 1570. Above the market there are just a few calls scattered at 1610, 1657, and 1700, but there are many more tweets mentioning 1600. We suspect that traders want to see a few more companies report earnings before making predictions or placing anything but obvious trades like selling 1600 and buying 1575.
Sentiment for the market’s major sectors saw financials move into positive territory while industrials and consumer staples fell. This is an encouraging sign that the flight to quality is starting to ease.
When we put all of our sentiment indicators together we get the impression that the bulls are on the verge of a major victory. Their ability to push SPX to all time highs with a positive initiation thrust and confirmation from smoothed sentiment is a good setup for higher prices. The only thing standing in the way of the bulls is their lack of tweets for those higher prices. The tight range of support and resistance tells us that the bulls are waiting for permission to move above 1600. Twitter sentiment suggests that the market is poised to move higher over the next week, but will probably need some good earnings reports to give the bulls confidence to bid prices up.
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.
