Gauging Investor Sentiment with Twitter: New Update

March 11th, 2013

by Blair Jensen

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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) is finally showing some strength. We noted Tuesday on Twitter @DownsideHedge that daily sentiment gave a positive initiation thrust of +22. These signals are usually followed by at least a few more days of upward price movement. This is an encouraging sign for the market as it showed that the majority of traders were confirming the break above 1530 on SPX rather than shorting it.

After the warning from smoothed sentiment on January 29th, SPX saw both higher and lower prices while the market traded in a choppy fashion. It took a month of sideways movement and a large battle between the bulls and the bears before a winner emerged. We're seeing that Twitter sentiment performs similar to other technical indicators in that signals against the long term trend most often only cause a pause in price rather than a turn. I emphasize this because I believe trend is the most important factor in any technical analysis. All other indicators generally perform better when confirming the trend than they do when diverging from it. A trader is better served buying a dip with a positive divergence from technical indicators in a long term uptrend than selling a rally with a negative divergence during that same trend. We've observed this phenomenon many times in Twitter sentiment for the individual stocks we track.

Over the past month we also received a few indications from daily sentiment that the sell off might be shallow. It gave two negative initiation thrusts that were not followed by a few days of continued selling. We noted in our previous post that the large negative readings in sentiment were met with buying. This tells us that there are market participants that are under invested and waiting to buy any weakness.

Currently smoothed sentiment is back above the zero line after being in negative territory for over a month. It has now risen right back up to its descending trend line while price has rallied to a Twitter resistance level. A break above this line would serve as further confirmation of the current rally.

Twitter support and resistance levels for SPX firmed up last week with many more calls above the market than below. This tells us that traders are getting long and anticipating higher prices. Traders are still projecting 1560 and 1576 above the market. Support has moved to 1530 and 1500. Since we haven't moved substantially above 1550 we'll leave it a resistance for now.

It appears as if the bulls have won the battle and the all time highs in SPX at 1576 will act as a magnet. The sentiment reaction to that level should give us some hints about a break out to new all time highs or consolidation.

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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