We posted last week that Twitter Sentiment for IWM was diverging from price and that small cap stocks would likely consolidate before moving a lot higher. As of the close yesterday, smoothed sentiment for IWM has now had a divergence from price and also broken the confirming uptrend line. This meets the Twitter sentiment trade setup requirements we’ve observed before. As we mentioned in that post, don’t trade these setups because we don’t have a large enough sample set to know if they’re valid or profitable. In addition, this setup is a trade against the intermediate and long term trend for IWM. Trades against the trend are much more likely to fail and they also have much higher risk than reward potential.
What this signal is telling us is that IWM will most likely consolidate for a more than just a few days. This is because sentiment from traders has turned from a bullish bias to a bearish bias. Momentum stalled with the negative divergence, then it turned down with the break of the trend line, and further confirmed by breaking below zero. This is a place to be cautious with small cap stocks and wait for the signal to reverse. This will happen when smoothed sentiment diverges from price and then breaks the down trend line it has just started.