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The Downside Hedge Twitter sentiment indicator for the S&P 500 Index (SPX) continues to show a positive bias. As SPX traded back below 1700 there were not as many bearish tweets or as much top calling as there was on the previous fall from that level. This indicates that traders are not as quick to short 1700 and investors are getting comfortable with a few down days now and again. Although the market closed down every day but Thursday the daily indicator didn't dip far below zero. It took a weekly lower close to bring out a significant number of bears.
Smoothed sentiment remains well above zero, however it is painting a negative divergence from price. The divergence meets our "three weeks" criteria that will set up a consolidation warning if smoothed sentiment falls below its uptrend line (which is roughly near zero). This isn't a prediction, instead I'm merely giving notice that it's something that we're watching closely. A little more consolidation where smoothed sentiment makes another trip back down to the uptrend and holds would be a positive for the market and most likely create another confirmation of the uptrend (by moving back above the current down trend line). The green and light blue vertical lines on the above chart represent previous times when sentiment reconfirmed the uptrend in the market.
Support and resistance levels generated from the Twitter stream contracted severely last week. The vast majority of tweets called for levels between the most recent low on SPX near 1675 and the most recent high near 1710. Only a few scattered tweets mentioned prices outside that range. 1700 was by far the most tweeted level and is being watched closely by a large number of market participants. A move above that level will most likely bring new highs, while a move below 1675 will probably create a quick move to the 50 day moving average near 1660. The overall message from support and resistance is that the market is coiling for a move as traders wait for a break of the recent range.
Sector sentiment on Twitter is showing the most positive bias for technology, basic materials, and health care. Energy, industrials, and utilities have the most negative bias. The rotation to basic materials may be a value play or a bet on an improving economy and subsequent inflation. It could also be a fear play that once QE ends hard assets and commodities will provide more safety than stocks and bonds that have been propped up by the Federal Reserve.
Overall sentiment is painting a picture of market participants biding their time. A fall below 1700 didn't bring strong negative sentiment and support and resistance levels have contracted to the recent highs and lows. Meanwhile, smoothed sentiment is comfortably sitting between converging trend lines. The most likely resolution is still new highs, but a break below 1675 would negate that view.
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.