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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) has started to deteriorate. We mentioned last week that an extremely high reading near short term highs where smoothed sentiment is diverging from price often warns of an impending top and that the market should consolidate at support between the 1390 and 1410 area on SPX. We were watching to see how sentiment reacted to the consolidation. We warned that a break of the recent trend line in smoothed sentiment would be our second warning of a top. That has now occurred. However, smoothed sentiment is sitting right on the zero line (actually, barely below it), suggesting that the bulls have not given up yet.
Another positive sign for the market is Friday's print in daily sentiment which rose above Thursday's level even though SPX fell by more than 1%. This small divergence is a result of many tweets about the market being at an inflection point and traders that continue to buy near 1400 on SPX. We suspect those positions will be unwound if the market breaks below the 200 day moving average near 1390. Further weakness that brings negative sentiment will most likely break the backs of the bulls which will result in a continuation of the current down trend.
Over the past week Twitter support and resistance contracted to one of the narrowest ranges we've ever seen. There is a large cluster of support in the 1395 to 1400 range on SPX and a cluster of resistance in the 1420 to 1425 range. The calls for 1460 and 1500 have disappeared. As have most of the calls for prices below 1395. This tells us that traders are watching for a break either up or down before committing much money. So a break in either direction will most likely bring a sharp move in price as traders chase the break.
It's make or break time for the market. We've had a good consolidation of the move out of the November lows. This consolidation has occurred above a critical support level with deteriorating sentiment. Price is being squeezed in a narrow 2% range of support and resistance. The market is now resting on support with smoothed sentiment clinging to the zero line. All of this suggests uncertainty by market participants. Using only technical analysis of Twitter sentiment, support, and resistance we get this strange feeling that market participants are waiting for some big event. I wonder what that might be? Regardless of the event, we'll be watching to see how sentiment reacts to a break of the current range, as that will help us plot the next move in the market.
Note : I have created a download page so readers can load the sentiment indicator into their own chart packages. It's located here.
Note from dshort : Here is a YouTube video in which Blair gives an explanation of the indicator and examples of how he used it in his posts over the last several weeks.
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.