Gauging Investor Sentiment with Twitter: New Update
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Over the past week the Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) continued to make higher lows as the market consolidated below 1475. The move above that level did not bring with it confirmation on the daily indicator as many investors still don't believe this rally can last and are tweeting that a top is imminent. However, the tweets calling for a top are still outnumbered by tweets from bullish traders who are buying the breakout. This suggests the market should continue to move higher.
Smoothed sentiment fell during the recent consolidation. However, it didn't fall significantly below zero and now has a new series of higher highs and higher lows. This trend serves as continued confirmation of the rally out of the November lows. It still has a negative divergence with price, which suggests that any move higher will be hard fought as each new high will be met with selling by market participants concerned about an impending top.
The lowest support level from trader's tweets has moved up to the 1440 to 1450 area on SPX. The move in price above 1475 on SPX has changed that level from resistance to support. Traders are no longer looking down as there are no calls for prices below 1440.
Above the market the 1490 to 1500 area continues to build as a strong resistance level. This area has been creating a solid line for several weeks as traders mention it on a daily basis. The market will most likely pause in this area as longer term investors who are warning of a top continue to sell shares and shorter term traders sell against an obvious resistance level. The only tweets above the 1500 level are left-over predictions of where the market will be at the end of 2013. This provides room for the market to run if 1500 is eclipsed.
Using only Twitter sentiment, support, and resistance as a guide, we suspect that the market will continue to move higher in the near term. However, that move will be muted as sellers appear in the 1490 to 1500 area on SPX. This area could have enough selling pressure from both traders and longer term investors to create a minor correction that carries down to 1450. However, we suspect that move will occur further in the future. Any break of the uptrend in smoothed sentiment or a downside initiation thrust on daily sentiment will be our first warning that a correction has begun. A move above 1500 in the near term should bring with it a sharp move higher as traders and investors get caught on the wrong side of an important resistance level.
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.