In our weekend update for Twitter sentiment we mentioned that we were seeing a higher number of stocks warning that they might need to pause. Cisco Systems (CSCO) provides an example of a Twitter sentiment warning. From the first of the year through mid February smoothed sentiment for CSCO generally confirmed the upward movement in the stock. Then the stock dipped 5%. This dip caused smoothed sentiment to fall as well, however, the fall was not steep which served as confirmation that CSCO still had support for traders on Twitter. We often refer to that condition as a confirmed uptrend.
When CSCO broke higher in early March we noticed a negative divergence in smoothed sentiment. Then in mid March sentiment fell below the confirming up trend line. It is the combination of a negative divergence and a break of a confirming trend line that signals a warning. This does not mean that CSCO is likely to change direction. It merely serves as notice that CSCO may need time to consolidate recent gains. On the pie chart below CSCO would be classified as a Negative Alert. Stocks that had a confirmed sentiment down trend line broken to the upside after a positive divergence would be classified as a Positive Alert.
Currently eight stocks out of the fifty most active stocks on Twitter are warning that they may consolidate. This is the largest number we’ve seen warning at the same time since the first of the year. Leading up to the dip in the stock market in February we saw a only handful of stocks warn and most cleared their warnings within a few days. Contrast that with Goldman Sachs (GS) which first warned in mid February and is still on a warning. Facebook (FB) warned near the end of February and then in mid March we got warnings for MS, JPM, INTC, SBUX, ORCL, and CSCO.
Looking at the bigger picture we have 28% of of the fifty most active stocks on Twitter showing bearish sentiment patterns (confirming a down trend, warning of consolidation/negative alert, or in a down trend with a positive divergence). 48% are showing bullish sentiment patterns (confirmed up trend, positive alert, or in an up trend with a negative divergence). Please note that we consider a stock in an up trend with a negative divergence from Twitter sentiment as bullish. This is because we’ve observed several stocks paint a negative divergence as a way of clearing overly bullish sentiment. We wait for sentiment to weaken to the point where it breaks its bullish up trend line (after a divergence) to trigger a warning. 24% of the sentiment charts we look at didn’t give a clear indication of a direction.
Bank of America (BAC) is an example of a stock with a negative divergence in Twitter sentiment without breaking the confirming up trend line.