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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) strengthened a bit over the last week; however, it is not confirming the sharp upward move from 1400 to 1465. It is painting a negative divergence with price on both daily and smoothed sentiment. Although traders are tweeting about higher prices, they believe the market needs to consolidate before moving higher. Longer term investors are tweeting about their belief that the current rally is the last gasp before the market turns down for a substantial correction or even a bear market. Add to that the general uncertainty that comes before earnings season and we get a rally with diverging sentiment.
Smoothed sentiment broke below its rising up trend line a few weeks ago. It is still trading below that point even though SPX is nearly 50 points higher. This is not encouraging for the bulls. However, smoothed sentiment is still above zero and above the low it painted the previous week which tells us the bulls are still winning. The break of the trend line and the current divergence suggest that this rally is getting tired. This increases the odds for a consolidation before the market can move substantially higher.
Twitter support and resistance levels rose dramatically last week with calls for prices below the market virtually disappearing. In fact, most of the tweets below the market were points that traders expected to buy on a dip. The support levels mentioned the most were clustered in the 1445 area on SPX so we consider it major support. Below that we have 1400 as the next major support level. Above the market the September high near 1475 is the most tweeted level with 1500 coming in as a close second. There are some scattered tweets above 1500, but not yet in sufficient volume to create likely targets. The tweets for higher prices suggest that traders are looking up once again.
Taken all together the most likely near term direction will be down, but it shouldn’t do serious damage to the market as buyers should appear below 1450 on SPX. We expect some consolidation, then a move higher (baring very bad news). Any move upward should be slowed by 1475 and pushed back when it reaches 1500.
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.