Twitter Indicators for Stock Market Analysis
Downside Hedge has developed two stock market indicators based on Twitter streams.
Twitter Stock Market Sentiment Analysis
Our first indicator captures and analyzes sentiment about specific securities and stock market indexes. We build a sentiment score by feeding our computer system tweets about stocks and market indexes. Our system examines tweets for chart patterns, buying, selling, hedging, technical analysis, and future predictions. The system scores each tweet on a scale indicating how positive or negative the commenter is about a stock. Then it does a little bit of math to aggregate the tweets and compute a score for each security every day.
Tracking sentiment via Twitter has several advantages over weekly sentiment surveys. Below we compare the American Association of Individual Investors (AAII) sentiment survey to the Downside Hedge Twitter Sentiment Indicator. The AAII sentiment survey asks investors if they are bullish, bearish, or neutral on the stock market over the next six months. When the AAII survey is extremely bullish it indicates that investors have already allocated their money in expectation of higher prices in the market. This removes buying pressure which often produces market declines. As a result, it performs best as a contrary indicator of extreme sentiment, rather than a confirming indicator of daily or weekly price moves. Due to the lag of a sentiment survey, AAII tends to follow price and is generally only useful in spotting extreme levels of bullish or bearish opinions.
The Downside Hedge Twitter Sentiment indicator is computed daily from traders and investors tweeting about their trades, portfolio adjustments, and market bias in real time. As a result, our sentiment indicator reflects daily buying and selling pressure for a particular stock, ETF, or an index. This makes it a good confirming indicator that can be used similar to other technical analysis tools like RSI, Stochastic, and MACD.
The daily sentiment indicator tends to lead price because it aggregates tweets from traders (with their bias) on a daily basis. It can be used to predict price reversals when it diverges from price, confirm price reversals with initiation thrusts, and confirm a market trend when it paints a pattern that mirrors price. The video below shows you live examples of how we used it over a six week period.
Smoothed Twitter sentiment shows changes occurring during the week that a weekly survey can’t. As an example, the consolidation above 1400 on the S&P 500 Index in August of 2012 showed a large build up of negative sentiment as traders tweeted about fears of the market rolling over, chart patters such as double tops, and entering short positions. This move to extreme negative sentiment is not reflected in the AAII Sentiment Survey because the move happened during the middle of a trading week.
Another advantage of tracking sentiment by following tweets is the ability to create a sentiment indicator for each individual stock. This allows traders to gauge the bias of many market participants on a specific stock and time their trades with other traders. Below is a video explaining how we use Twitter to time stock trades. Follow us on Twitter @DownsideHedge for notification of all the trade setups.
You can see updates to the stocks and indexes we follow in our Twitter Stock Sentiment Indicator posts. You can also download the Twitter Stock Market Sentiment Indicator here. We also track a portfolio of the most bullish stocks on Twitter here.
Twitter Stock Market Support and Resistance Levels
Our second indicator scans tweets for support and resistance levels. We calculate support and resistance levels on securities where several people are mentioning targets or zones for a stock price.
Below is an example of support and resistance generated from the Twitter stream for the S&P 500 Index (SPX). The red dots represent several tweets on the same day for a specific price. Price on SPX has a good track record of respecting the support and resistance levels generated by aggregating traders tweets. This is due to the fact that actual traders are tweeting the levels where they plan to buy or sell stocks. They often tweet specific price targets in advance of any action they take so support and resistance build in advance of price.
When the market changes from bearish to bullish the volume of tweets for prices above the market rise and tweets for lower prices slow down. The tweets above the market create a price target (or resistance level) that can be used by traders to take profit and by investors to make adjustments to their portfolios. When price moves above a major resistance level it often becomes support that traders can use for short term trades. Investors can use major support levels as a place to buy dips. During down trends the resistance levels can be used to raise cash.
Updates to support and resistance levels for the stocks we follow can be viewed in our Twitter Support and Resistance posts. This video explains more about our Twitter support and resistance levels and how we use it.