Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) continues to confirm the breakout above 1600, however, the daily indicator is showing some lower prints. As the market pushed higher above the 1625 range we started to see a lot of tweets indicating traders thought the market was overbought. Those tweets mentioned technical indicators such as Bollinger bands, trend channels, the McClellan oscillator, and the distance the market is above its moving averages. This suggests that traders believe the market is due for a short term pull back. We're glad to see these types of tweets increase as it indicates some rationality is returning to the market which is in contrast to the chasing of price we've seen over the previous month.
Smoothed sentiment is holding up well because bullish and bearish tweets are fairly matched even with all the mentions of overbought conditions. The trend of smoothed sentiment is up and it is above zero indicating that market participants have an overall bullish bias.
Twitter support and resistance levels are showing a small layer of support at 1625 on SPX and a strong floor below the market at 1600. This suggests that any pull back should see buying at that level. We're also seeing calls for a larger pull back to the 1535 area replacing last week's support near 1570. This gives us a bit of concern that 1600 is now a must hold level. If the market starts to consolidate we would like to see the calls for 1570 return. Above the market 1665 remains a popular target and we're also starting to see renewed calls for 1700.
Sector sentiment continues to show rotation out of defensive stocks and into sectors that have lagged in recent months. Industrials, technology, and basic materials are garnering the majority of the positive tweets, while consumer staples, utilities, and health care show a negative bias.
This market has all the ingredients necessary to move higher. A recent break above an important resistance level that held, traders only expecting a small short term pull back to a very large support level, and leading stocks showing strength in sentiment. The 1600 level on SPX is probably the most important thing to watch in coming days. For continued confirmation of the uptrend we want to see any pull back accompanied by smoothed sentiment painting a low above April's consolidation warning.
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.
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.