Gauging Investor Sentiment with Twitter: New Update

Courtesy of Doug Short.

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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) did not confirm the move in price over the past week. The daily indicator printed mostly flat readings as the market rallied on Tuesday, Wednesday, and Thursday. It took a move in SPX up to its 50 day moving average that wasn’t sold aggressively to convince traders that the rally might stick. This allowed a modestly bullish print of +12 on Friday.

Smoothed sentiment declined throughout the week, but caught at the upward sloping trend line it’s been painting since February. This suggests that the uptrend in price out of the November 2012 lows may have more room to run. A break in smoothed sentiment above its downward sloping trend line would reconfirm the rally, while a break below the uptrend line would create a consolidation warning. We should see one of those signals over the next week as we’re very close to the apex of the triangle created by the converging trend lines.

Support and resistance levels generated from the Twitter stream tightened this week with major support at 1600 and last week’s lows at 1560 on SPX. The first major resistance level is 1620. A break above 1620 will most likely bring with it a lot of buyers currently sitting on the sidelines. The other levels traders are targeting are 1635 and 1650.

Sector sentiment continues to give a slightly mixed picture that is improving. Technology and consumer discretionary stocks regained a positive bias this week. They join financials and energy that were already positive. The defensive sectors of utilities and health care also showed strength. Utilities were so oversold that the positive reading may reflect buying the dip rather than rotation to safety. Consumer staples are showing weakness which is another positive for the market.

Overall sentiment is constructive, but not showing the strength we’d like to see coming out of a short term low. Support and resistance levels are tightening around obvious price targets (recent lows and recent highs) which suggests market participants will pile on to any break below 1560 or above 1650 on SPX. The triangle being painted in smoothed sentiment also suggests a willingness to wait before taking action. We have to give the edge to the bulls since smoothed sentiment is above its uptrend line and technology and consumer discretionary stocks show improving sentiment.

Note: I’ve created a video that focuses on how I use the indicator to trade individual stocks.

Here’s some written explanation about the video that clarifies some things and also describes what the annotations on the charts mean.

Here also is a download page so readers can load the sentiment indicator into their own chart packages. It’s located here.

Here is an earlier YouTube video that a basic explanation of the indicator.

Blair Jensen at Downside Hedge tracks Twitter sentiment and provides hedging strategies for individual investors.