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) fell sharply over the past week. The daily indicator didn’t produce any strong readings even on days the market rallied. The initial jubilation from traders on Twitter when SPX pushed above 1730 has quickly dissipated. Smoothed sentiment painted a negative divergence with price into the last peak which suggests traders were taking profit and shorting into that rally. Then a small drop in price caused a steep drop in sentiment indicating that others started to pile on to the trade.

That behavior was expected given the fact that SPX had a large volume of tweets projecting a top at the 1775 level. The tweets lead price by two weeks and acted as a magnet to pull prices higher. Once 1775 was reached it provided the stiff resistance that was expected. Currently traders are still looking down, but not very far. Most of the tweets over the past week are calling for prices in the 1750 to 1740 area. Going back two weeks we have projections as low as 1730 so for now I’ll leave 1730 on SPX as support. Above the market 1775 and 1800 are resistance. Traders have had an opportunity to sell 1775 so there is a higher probability of moving above that level if the market rallies.

As mentioned above, a small drop in price has caused a steep drop in sentiment. This is similar to both the August and September tops. The pattern suggests that lower prices are still ahead, at least in the short term. Smoothed sentiment is currently sitting right above zero and its confirming up trend line, but all it will take is a few negative prints from the daily indicator to drag smoothed sentiment lower and provide warning of more price weakness ahead.

Sector sentiment continues to show rotation to safety at the same time as the leading sectors are being bought. In the past this has been an indication of a short term top and adds weight to the argument that more weakness is ahead.

Taken all together, sentiment is predicting lower prices. It would take a continuation of the rally first thing Monday morning with confirming sentiment to give the market any hope in the short term.

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.