The Downside Hedge Twitter Sentiment indicator for the S&P 500 Index (SPX) has been moving sideways with a negative bias over the past several weeks. This action continued again last week confirming the negative trend of the market. We stated in our last sentiment update that the large negative print on our daily indicator combined with a price reversal often acts as an initiation thrust and that we were on guard for a large move to the downside. We got that move on Wednesday as market participants tweeted a loss of confidence in the US government to reach a solution on the looming fiscal issues they face. That day gave another very negative print that reached the same level as October 19th when it was apparent that GOOG, AAPL, and IBM were breaking down.
Our concern now is that investors are starting to recognize that there are no easy solutions to the US budget issues. Even their positive tweets aren’t getting scored very high by our system as many traders state that SPX should bounce, but that it will be temporary and lower levels are ahead. We got enough positive tweets on Thursday to paint a divergence with the price action and by Friday sentiment turned positive as traders expressed their opinion that the market was severely over sold. We’ve annotated the chart with the beginnings of a triangle pattern on the daily indicator that suggests consolidation ahead, however, it might be premature as any print higher than the current level will invalidate it.
Our smoothed sentiment indicator is still confined to the down trend line we first painted on October 16th. It is also still well below zero. Until this trend is broken the direction of the market will be down. Smoothed sentiment does have a short term positive divergence which bodes well for at least an oversold rally. We’ll be watching this week to see if any rally brings with it optimism or if it continues to be met with traders selling. Our expectation is that we should at least see some consolidation while money managers digest the results of the US elections and the budget negotiations.
Our Twitter Support and Resistance levels continue to fall along with the trend of the market. Early in the week we saw a small amount of tweets calling for prices above the market. Most of them were targeting the 1475 level on SPX. When the market fell on Wednesday traders targets also fell, making 1330 the most likely upside target. The decline below 1400 also turned that level from support into resistance. Each level that was broken brought with it many tweets stating that those levels needed to be regained. We consider 1400 and 1430 as major resistance levels with 1375 as an unlikely target on the upside.
Below the market 1380 on SPX is by far the most important level tweeted. It corresponds to the 200 day moving average on the index and traders consider it a line in the sand. Most traders believe that if 1380 is broken decisively that the market will visit 1320, which is 4% below current levels and 10% below the high made in September. There were a few tweets in the 1350 to 1360 level, but they were overshadowed by the volume of tweets calling for 1320 so we consider 1380 critical support and 1320 as major support below.
For 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.
Images: Flickr (licence attribution)
About The Author
My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.
My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.
Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.
Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.