Gauging Investor Sentiment with Twitter: New Update

February 4th, 2013

by Blair Jensen

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The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) had an extreme negative reading of -19 on Thursday of last week. This didn’t quite meet our criteria for a negative initiation thrust, but should serve as a warning that there are a lot of market participants on Twitter cheering weakness and shorting the current levels. Friday brought a moderately strong reading of +14 on a day that SPX rallied more than 1%. The daily indicator continues to print lower highs as more bearish tweets show up even as the market moves higher. The tone from the bulls is mixed between "I told you so" and mere observation that the market is making new highs. The bears vacillate between being incredulous and angry. The battle between bulls and bears continues to rage, but not quite at the levels of the previous week.

Smoothed sentiment broke below zero over the last week, giving us another warning that this rally is getting extended. Sentiment has been diverging from price for over a month, has broken below its confirming trend line, and is now below zero. These conditions suggest that the bears are building to a point where they will soon turn the market downwards. However, many traders calling for the market to top are also looking for an entry point below current prices. This indicates that any correction should be shallow.

Twitter support levels rose again this week with calls below 1470 on SPX drying up and calls above the market rising to the 1570 level. 1520 and 1550 were the most tweeted areas above current prices so we consider them major resistance. With the market breaking above 1500 and successfully retesting it last week that level changed from resistance to support. 1500 was by far the most tweeted number and is becoming a strong line in the sand for both bulls and bears. We consider 1500 and 1470 as major support.

We have a condition where support and resistance are looking upwards while sentiment is turning bearish. This tells us that the market might move higher into the 1520 or even 1550 level before correcting, but each higher print will be met with more sellers. As we mentioned above, many market participants are looking for a correction that they can buy, so any dip will be met with buyers. A correction that starts near 1520 or below could carry as low as 1470 on its first stop. While a blow off run to 1550 would most likely come back to 1500 before determining the next direction.

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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