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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) gave another consolidation warning this past week. The previous warning resulted in only a few days of selling before it was cleared by a strong move up in price that was confirmed by bullish sentiment. While the last warning came as price was near a new high, this warning comes after several days of selling. This suggests that last week's selling shook the confidence of the bulls. We mentioned in our last update that the bulls needed permission to move SPX above 1600. They didn't get it, which resulted in a loss of certainty.
The daily indicator painted a negative initiation thrust right behind a positive initiation thrust. During the same time smoothed sentiment started to mirror price. Both of these conditions imply that traders chased the break above 1575 then quickly reversed their positions on the fall back below that level. This is a sign of instability and is a cause for concern. On the positive side, daily sentiment is diverging from price as it falls to the 50 day moving average. This suggests that we could see some strength early next week.
Many market technicians are starting to point out that SPX could be painting a head and shoulders pattern. We're not in that camp. We believe we're seeing a broadening top or a megaphone pattern. The whip saws in daily sentiment and recent consolidation warnings lend credibility to that pattern. Traders and investors alike are uncertain and simply chasing price. We suspect that the market is going to make very sharp moves (either up or down) over the coming weeks.
Twitter support and resistance levels widened a bit this week, but it was to the downside. The tweets for 1535 on SPX are being replaced by calls for 1525. While the tweets for any level above 1600 have stopped coming. 1575 continues to be the most popular upside target.
We're seeing something in sector sentiment that we haven't noticed before. Every sector is negative. The defensive sectors still have the highest readings so we can only conclude that there is a full on flight to safety under way. Last week's consolidation in price brought across the board negative sentiment. This suggests that not only are investors selling their leading stocks, they are also starting to raise cash from their defensive stocks. If this trend continues it will result in a very sharp sell off since the defensive sectors have accounted for much of the market's gain from the beginning of this year.
Twitter sentiment, sectors, and price levels point to lower prices in the market. Last week damaged the psyche of market participants. They are being whipped back and forth between fear and greed which is causing instability. Although the positive divergence in daily sentiment suggests some strength early in the week, this is a time to be cautious. Even though major support is at 1525 on SPX, we suspect any break below 1535 will probably bring with it strong selling.
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.