Gauging Investor Sentiment with Twitter: New Update

November 19th, 2012

by Blair Jensen

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) painted a positive divergence with price last week as traders became more bullish with each further price low. There were a large volume tweets about the market being oversold and that the decline was overdone. Friday's positive reading was enough to invalidate the triangle pattern we talked about in our last update. The positive divergence suggests a rally early this coming week. For a durable rally we want to see a much higher reading on the daily indicator as it will confirm that traders aren't shorting the rally (and tweeting about it).

Smoothed sentiment broke the down trend line that has been in place since early September. In addition, it closed last week above zero. Both of these conditions are positive and add weight to the prospect of a rally. We're cautiously optimistic, but will be watching sentiment closely as the market approaches our resistance levels.

Tweets for prices far above the market dried up last week. We only had a few tweets for any level above 1400 on SPX. The majority of tweets above the market were in the 1380 range making it major resistance. Above that we have 1400, but that level is slowly losing advocates as a price target. The 1430 level was only mentioned on Monday last week so we consider it an unlikely target for the first leg of any rally attempt.

The number of tweets below the market rose substantially as traders became fearful of a waterfall type decline (as if the trip down from 1330 hasn't been a waterfall decline). The majority of tweets called for support at around 1320 on SPX making it our primary support level. A growing number of traders tweeted 1250 as a likely target for a continued downtrend so we consider it minor support. We also started seeing a few tweets for a catastrophic decline that would take SPX back to the 666 level. We consider them outliers, but are taking note because it indicates fear is creeping back into investor's minds.

With sentiment, support, and resistance taken into account, we believe that the market should rally. However, that rally will most likely be stalled near the 1380 or 1400 level. We'll be watching daily sentiment to see if it confirms the price move or diverges from it. We'll also be looking for tweets above the 1400 level as confirmation that the bottom is in. A negative divergence and lack of upside price targets will most likely bring with it a decline to 1320 on SPX.

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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