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) has reconfirmed the uptrend with smoothed sentiment breaking above a three week down trend line after a short positive divergence with price. The break to the upside occurred with daily sentiment printing a very high +19. A reading above +20 on the daily indicator when price is moving out of a low is considered an initiation thrust and generally indicates a few more days of buying is ahead. It also adds further weight to the confirmation of the uptrend because it signals that bulls are buying the dip aggressively while shorts are covering.

Another sign that at least a short term low has been put in place is that the volume and intensity of language in tweets spiked as the market moved lower, while at the same time sentiment painted a positive divergence. This indicates that as price fell there were enough people talking about buying the dip that they overwhelmed bears who were cheering the move lower.

Support and resistance levels generated from the Twitter stream tell a much more muted tale. Traders are still very reluctant to target prices above current levels. 1710 on SPX generated a few tweets, but nothing significant. This is the same condition that existed during the rally into the last peak. This suggests that traders see a very low risk reward on the upside. In fact, their projections pit a fraction of a percent to the upside against four to six percent downside risk. This is in contrast to the June/July rally where traders were targeting 1750 shortly after the market cleared the 1650 level. There have been a large number of tweets for 1700 over the past week and we only have one close above that level so I’m still considering it resistance.

Below the market there are several areas being targeted. There is a large cluster between 1670 and 1680. The 50 day moving average (EMA) is near 1675 so I’ll label it as the first level of support. Below that another large cluster appears near 1625 with a few tweets calling for 1600.

Sector sentiment is much more constructive than it has been over the past month with only consumer discretionary stocks showing a negative bias among the leading sectors. Meanwhile, the defensive sectors of consumer staples and health care are losing sponsorship.

Although traders are reluctant to target higher prices, other indications from sentiment suggest the market should move higher over the next few weeks. Smoothed sentiment has reconfirmed the uptrend, daily sentiment almost printed an initiation thrust, and sector sentiment is constructive.

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.