Gauging Investor Sentiment with Twitter: New Update

January 14th, 2013

by Blair Jensen

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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) continued to move higher this past week as traders tweeted about putting on more long positions and their belief that the market should continue to rally. Early in the week market participants were looking for lower prices that they could buy. On Wednesday their tweets became more positive as many felt the small correction was merely profit taking and most likely over. Many were encouraged by SPX holding above 1450. As SPX moved back up into the 1465 to 1475 range traders became more cautious, creating a negative divergence with price on the daily indicator.

In our previous update we noted that smoothed sentiment was diverging from price, which led us to conclude that the most likely near term direction was down, but any consolidation shouldn't do much damage in price. The market performed as expected, and now a week later smoothed sentiment continues its negative divergence from price; however, it is also moving higher. This suggests that the market should grind slowly higher or may need just a bit more consolidation before SPX can break above 1475.

Twitter support levels rose this week with the majority of tweets clustered in the 1440 to 1450 area, making it major support and a level the bulls need to see hold. Another small layer of support still exists at 1420, but below that it's all white space. This suggests that traders aren't even considering a trip back to the 1400 level.

Above the market there is still strong resistance right at 1475 on SPX, and another cluster is building in the 1490 to 1500 area. There were a large number of tweets for 1490 and 1492 which referenced a major top call from Tom DeMark of Market Studies. For more on that call, see this Bloomberg video clip.

The large volume of tweets tells us that a lot of market participants will sell that level, making it major resistance. How the market reacts to SPX 1492 will give us a strong indication of its next intermediate term move.

Our conclusion is that the market will most likely continue to consolidate or grind slowly higher in the near term. Any move higher will be stalled in the 1490 to 1500 area. We will be watching sentiment closely to see how it reacts to those levels for clues that warn of a larger correction or indicating the market wants to go higher.

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.

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