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The Downside Hedge Twitter Sentiment Indicator for the S&P 500 Index (SPX) is starting to show weakness along with the general market. Over the past two weeks the daily readings have been mostly positive, but declining. Friday printed a fairly negative reading of -16 which is the lowest reading we've seen since mid-April. It is our first indication that traders on Twitter are becoming decidedly bearish. In the individual tweets we're seeing a lot of top calling rather than calls for consolidation.
Smoothed sentiment diverged from price for a little over a week and is now following price lower. This puts us in a position where we can't rely on sentiment as anything other than confirmation of lower prices. We prefer a longer divergence (three weeks to a month) to issue a consolidation warning. With smoothed sentiment now below zero it suggests we'll continue to see lower prices or at the least a choppy market.
Over the past two weeks the 1650 support level generated from the Twitter stream for SPX held fairly well on a closing basis. Minor support near 1635 held intra-day. Friday's action blew through both of those levels leaving 1600 as the market's next support. Below that there is a cluster of support between 1575 and 1585, but also a lot of white space. This tells us traders aren't expecting prices to fall below 1600. The 50 day moving average for SPX is just above 1600 so it is a likely place for the market to bounce. Above the market we have resistance at 1650, 1687, and 1700.
Sector sentiment is showing positive rotation out of the defensive sectors of Consumer Staples, Utilities, and Health Care. All the other sectors are showing a positive bias. This lends weight to the argument that the current consolidation is healthy and shouldn't be too deep.
Sentiment is telling us that this should be a normal consolidation of a rally. Traders aren't targeting substantially lower prices, leading sectors have a positive bias, and smoothed sentiment is merely following price. We'll be looking for a positive divergence in smoothed sentiment or a move back above the zero line as our first clue that the selling is starting to abate.
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.