Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) strengthened substantially last week. The current move up started with a positive divergence with price as people tweeted that 1430 was a durable low. It had stalled early last week at the zero line as traders talked about their fear that the market couldn't break out above the previous highs of 1475. But the consolidation on our daily sentiment indicator was resolved to the upside on Thursday due to the sharp upward move in price which held into the close for SPX. The move was strong enough to push our daily indicator into over bought territory. In fact, Thursday registered the highest reading to date which is an encouraging sign. Over bought conditions on a daily basis are usually a type of initiation thrust that is followed by three to five days of consolidation, then a move higher.
The Smoothed Sentiment indicator fell below the rising trend line we've had in place since early September. But it quickly recovered as traders became more positive in their tweets. Last week there were many tweets about taking profit but not making major position changes in portfolios. On Thursday many people started tweeting about adding long positions as they anticipated the market would move higher. In addition, the week brought many positive tweets about 1430 on SPX being the low for the current correction. These comments by market participants have been enough to move smoothed sentiment back above the zero line before price has broken above the recent highs. This is an encouraging sign that investors are positioning themselves for a move higher.
The Twitter Support and Resistance levels widened on the upside, but narrowed below the market. This is a very positive sign as tweets for 1500 started up again last week. We even got a few isolated calls at 1575. Since this appeared like an outlier I researched the source of the tweets and found that it was a 2013 projectionůso take it for what it's worth. Most encouraging is that a cursory glance at the chart shows that there are many more tweets above the market than below. This reflects expectations of higher prices on SPX from market participants. Most of the upside tweets were between 1475 and 1500. Based on their volume we consider both 1475 and 1500 as major resistance levels.
Below the market there were no calls for 1400 and only a few isolated tweets naming 1420 as support. Traders are leaving those levels behind signaling that they are looking up rather than down, a positive sign. The twitter support and resistance chart for SPX shows a solid line of support at 1430 with a very large number of tweets mentioning that level every day for the last two weeks. As a result, we consider 1430 major support with 1420 and 1400 below. Overall, our Twitter indicators support our belief that the market is experiencing healthy consolidation before a move higher.
For 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.