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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) warned of consolidation again this week. We're starting to see the same type of pattern that was painted during February just before the market fell for several days. Positive days in the market aren't registering high readings in daily sentiment. This is a result of many traders wanting to short the all time highs on SPX near 1576 and investors stating that they believe the market should correct before moving on to new highs. Monday's sentiment painted a negative initiation thrust that often precedes a few days of selling and can signal a shift in overall sentiment from bullish to bearish.
The intensity of tweets is rising. This is a condition we often see near turning points or when the market is volatile. Both Wednesday and Friday registered high volumes and scores as people on Twitter gave their opinions about the effects of bad economic reports. The overall tone was bearish, but not enough to register another initiation thrust. That and the price action on Friday give some hope to the bulls.
Smoothed sentiment broke its confirming uptrend line after diverging from price for over three weeks. This serves as warning that the market may consolidate. Adding to that warning is a reading below zero which tells us that bearish sentiment has overpowered the bulls for several days.
Twitter sector sentiment saw Energy turn negative while Industrials went positive. All the other sectors continue to show defensiveness by investors. Consumer Discretionary stocks are the only leading sector that is positive. Financials, Technology, and Basic Materials continue to lag while the defensive sectors show positive sentiment. The shift from Energy stocks to Industrial stocks may be signaling a flight to quality.
Twitter support and resistance levels widened a bit this week with most of the tweets calling for lower prices. 1550 on SPX continues to be a solid line in the sand. It garners the most tweets and SPX can't seem to close below that level. Further down there is a small layer of support at 1540, but major support comes in at 1530 and 1500. Above the market the obvious levels of 1575 and 1600 are major resistance.
So we're still in the range between 1550 and 1575 on SPX, but with weakening sentiment, a consolidation warning, and defensiveness showing up in sector sentiment. Looking strictly at sentiment the odds favor lower prices next week. Factor in price and we have to give the market the benefit of the doubt. Continue to watch the range as a break either above or below will most likely give us an intermediate term 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.