Gauging Investor Sentiment with Twitter: New Update

October 15th, 2012

by Blair Jensen

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The Downside Hedge Twitter Sentiment Indicator is currently showing a positive divergence with price on the S&P 500 Index (SPX). Even as the market fell last week sentiment continued to rise. This was a result of many people tweeting that the 1420 to 1430 level would hold. Many investors are also commenting about wanting to buy in the 1420 area. The volume of positive tweets was enough to keep our daily sentiment indicator in positive territory on both Thursday and Friday even though SPX painted poor chart patterns.

The smoothed sentiment indicator continued to show strength hovering just below the zero line in a week that that moved SPX from the top of its recent range to the bottom. This positive divergence with price has generally resulted in a resolution with price moving to the upside. The large area of Twitter Support in the 1420 to 1430 range also lends weight to a positive outcome.

The volume of tweets calling for higher prices dried up last week showing a slight shift in sentiment from positive to negative. The few calls above the market projected the S&P 500 Index would target 1475 or 1500. However, we did get a some isolated calls for 1600 by the end of the year. We still consider SPX 1475 and 1500 to be major resistance points.

Below the market tweets for support at 1430 on SPX continued to get (by a wide margin) the largest number of tweets last week. Traders believe that 1430 is a very critical level to hold. The market closed slightly below that level on Friday, however, the failure did not bring with it significant selling. We suspect this is due to the high number of tweets in the 1420 to 1425 range which reference several other lines of support converging in that area. The lines of support are; the 50 day moving average, the trend line from the June low, the last double top at 1425, and the lower end of the Bollinger bands. This makes the current level critical. For now, we’re leaving 1430 as major support with 1422 and 1400 below.

A few market participants started to show some fear by calling for SPX to fall below the 1400 level. This isn’t too concerning because Twitter sentiment continues to show strength. So overall people believe the current levels will hold, but a growing number of traders are showing concern. If nothing else the tweets below the current market level give us some targets if 1420 is breached.

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.

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