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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) cleared its consolidation warning and is confirming the move higher with strong readings in smoothed sentiment. It is still showing signs of traders chasing with wide swings on the daily indicator and a broadening pattern in smoothed sentiment that somewhat mirrors the megaphone pattern in price. The latest peak in smoothed sentiment appears to be confirming the break above 1600 in SPX. Our only doubt is a result of the recent chasing of price. The breakout is so new that we can't tell if it is a continuation of a broadening top or a clean break. Another week should give us a clearer picture, but for now we'll consider it a positive break to new highs.
Over the past week while SPX was below 1600 there were virtually no tweets above that level. Traders were reluctant to make predictions of higher highs. In addition, there were very few tweets for prices below 1570 making a very tight range. Once the market moved above 1600 everyone suddenly got an opinion and started targeting prices mostly in the following ranges; 1625, 1640, and 1665. At the same time support levels magically moved up to 1600. This highlights the level of uncertainty of traders on Twitter. There is still a cluster of support near 1570 that we view as a must hold area on any consolidation.
Twitter sector sentiment continues to confirm higher prices with the defensive sectors of utilities, consumer staples, and health care lagging, while energy, technology, and consumer discretionary stocks show the highest sentiment readings. Our only concern is financials which are showing just a slight positive reading. The tepid sentiment for financial stocks comes at a time when many of the big banks like Goldman Sachs (GS), Morgan Stanley (MS), and JPMorgan Chase (JPM) are still well below their recent highs. This isn't a condition we'd like to see if the market is going to sustain a rally.
Putting it all together we have to give the market the benefit of the doubt. Daily sentiment has a small divergence with price so we could see some weakness early next week, but 1600 on SPX should hold. The broadening top pattern may still be in effect so we'll be watching sentiment and support levels on the next dip to give us more clarity. Any break below 1570 on SPX that brings with it very negative sentiment will put the megaphone pattern back in play.
Note : I've created a video that focuses on how I use the indicator to trade individual stocks.
Here's some written explanation about the video that clarifies some things and also describes what the annotations on the charts mean.
Here also is a download page so readers can load the sentiment indicator into their own chart packages. It's located here.
Here is an earlier YouTube video that a basic explanation of the indicator.
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.