Gauging Investor Sentiment with Twitter: New Update

October 22nd, 2012

by Blair Jensen

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Last week the Downside Hedge Twitter Sentiment Indicator continued to diverge with the S&P 500 Index (SPX) on both the top and bottom of the recent range. We had strong upward price moves on Monday and Tuesday which didn't generate high readings on the daily indicator. Traders were tweeting that they were adding to short positions, noticing divergences in weekly charts, and targeting Fibonacci retracement levels. Many market participants tweeted that they believed the top is in place and that we won't see higher prices.

During the first part of the week we noticed that the low readings were mostly a result of increased selling, however, there was also enough buying to keep the daily indicator positive. We posted that we thought it might signal a wall of worry, but Friday's action seems to negate that belief. The low positive readings at the first of the week and the extreme negative reading on Friday have put in place a series of lower highs and lower lows in sentiment even as price moved sideways. This deterioration does not bode well for the market.

Our smoothed sentiment indicator is painting a triangle pattern that is very near the apex. There is a battle brewing between the bulls and the bears causing indecision in the indicator. This indecision is coming at very important support levels.

The Twitter Support and Resistance range tightened substantially last week (with the exception of a few very low outliers). Traders aren't looking up any longer. We haven't had any tweets above SPX 1475 since the 11th of this month. Almost all of the tweets are mentioning support just below the market in the 1420 to 1430 range. This signals how crucial it is for SPX to hold the 1420 level. We did have a few isolated calls for the 2009 lows, but for now we consider them to be outliers. This leaves support on SPX at 1430, 1420, and 1400 with resistance at 1475 and 1500.

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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