Gauging Investor Sentiment with Twitter: New Update
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The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) closed Friday with a reading of +19.4. We consider a print of +20 near a market low as an initiation thrust that often signals a resumption of an uptrend. Friday's reading indicates the market should continue to move higher in the near term.
Smoothed sentiment held up fairly well considering the 5% sell off over the past few weeks. It barely fell below the zero line which reflects the large volume of tweets we saw calling for a bounce near 1600 on SPX. We feel fairly confident that there is a triangle pattern in smoothed sentiment that is created from a longer term uptrend and a short term down trend. If smoothed sentiment can break above its down trend line it would create a buy signal based on one of our criteria for trading individual stocks. The long term trend line holding in sentiment with the 50 day moving average holding in price creates a possible setup. An initiation thrust followed by a break higher in smoothed sentiment creates the buy signal. We'll post an updated chart on Downside Hedge and on Twitter @DownsideHedge if we get a signal.
We're seeing an interesting shift in sentiment from the small consolidations in February through April. Those smaller price moves brought with them much more fear on the daily indicator and substantial dips below the zero line on smoothed sentiment. More traders then believed that the market was putting in an intermediate term top. During that time period we observed a lot of tweets mentioning underlying technical indicators pointing to lower prices. We are not seeing that today. Instead, most traders are focused simply on the need of a short term consolidation or correction before moving higher.
Support and resistance levels generated from the Twitter stream stayed mostly the same this week. There is major support below the market at 1600 and 1585 on SPX. Above the market traders are now targeting 1650, 1680, and 1700.
The sell off last week did some damage to Twitter sentiment for leading sectors. Only energy and financials held above the zero line. Sentiment for utilities moved back to positive territory suggesting that traders believe the recent correction in that sector is a bit overdone.
It appears that the market is poised to move higher over the near term. The important support level of 1600 on SPX held, we almost got an initiation thrust, the tone of tweets is constructive, and smoothed sentiment looks like it will flash a buy signal. A failure in smoothed sentiment at its down trend line and a break below its uptrend line will cause us to change our opinion to a resumption of the down trend.
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.