Our Twitter sentiment indicator for the S&P 500 Index is finally showing some strength as the market is attempting to break out to new 52 week highs. The consolidation at 1400 on SPX induced extremely negative sentiment levels. The longer the market stalled just above 1400 the more negative people got with their tweets driving both daily and smoothed sentiment to the lowest levels since the June low. It appears that this build up in sentiment got enough people committed to the short side of the market to allow a break out above 1410.
The move to 1415 was enough to get people excited about this rally’s potential pushing our daily sentiment indicator to our highest recorded levels. The consolidation on 8/17/2012 just above 1415 did not dampen sentiment and is helping to move our smoothed sentiment indicator quickly higher. We’ll be watching to see if a break through 1422 brings higher sentiment readings or a contraction back below the zero line (as has been the case for every higher peak since the June low).
Our Twitter support and resistance levels compressed during the consolidation above 1400. As the market stalled, the vast majority of tweets called for a range between 1400 and 1422. Market participants are now calling for lows of 1370 and highs of 1500 with a strong level of resistance at 1422. If 1422 is taken out most tweeters are calling for 1440, 1475, and 1500 as reasonable levels to attain. Of note is that no one has called for levels below 1370 for nearly two weeks.
Taking both sentiment and support/resistance levels into consideration we believe that a break of 1422 will cause a substantial short covering rally with the potential to carry SPX to 1500. Of course, a break below 1400 from these levels will cause life as we know it to end…until the Fed steps in with QE3.