Gauging Investor Sentiment with Twitter: New Update

November 26th, 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) showed a strong reading of +.22 last Monday. This was near a turning point in price. As we've noted in previous updates, extreme readings in the daily indicator near market turning points often act as an initiation thrust (in this case pointing to higher prices). The rest of the week brought those higher prices. However, sentiment started to diverge. Tuesday and Wednesday printed negative readings in daily sentiment as traders tweeted about consolidating Monday's strong up move. Then Friday's extremely strong price action generated a lot of tweets about the market running too fast on low volume. This has created a negative divergence in the short term, which warns that the market may pause in the next few days.

Smoothed sentiment has broken clearly above, and held, the zero line. This signals that there is more room for the market to rally over the intermediate term. Continued readings above zero will keep a positive bias in place. We'll be watching for a negative divergence, a close below zero, or a break of the recent trend line on smoothed sentiment for clues that the rally has run its course.

Our Twitter Support and Resistance levels generally followed price this week suggesting that traders were chasing the market rather than setting targets for their trades. There were only scattered tweets above and below the market, which suggests that market participants are uncertain about future price movement. Even so, the tweets did have a slight bias to the upside, targeting resistance at 1435 and 1475. Support below is at 1400 and 1380. However, these targets were calculated mainly from prior resistance rather than a large volume of tweets targeting them as lows. We'll want to see more tweets at 1400 and 1380 to have confidence that those levels are major support.

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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