Below is a video where I explain how we use Twitter sentiment to find trade setups for individual stocks.  As you watch the video keep some important points in mind.

• We almost always trade with the major trend of the stocks we follow.  This is one of the most basic factors in having a high win rate when trading.  Trends continue so the odds favor buying dips in an uptrend and selling rallies in down trending stocks.  Please note that we post all the trade setups we see on Twitter @DownsideHedge and StockTwits, whether with or against the trend, but we don’t recommend trading against the trend.

• For a stock in an uptrend we look for pullbacks to moving averages, trend lines, etc. where sentiment paints a positive divergence. A positive divergence signals accumulation by traders and longer term investors.  If sentiment continues to fall near obvious support levels it tells you that other aren’t seeing a buying opportunity.

• A consolidation warning doesn’t mean the stock is going to change direction, merely that bullish sentiment is starting to fall.  This can happen for a variety of reasons.  The first is that traders simply stop mentioning the stock as a buying opportunity. Other reasons include tweets about profit taking or mentioning overhead resistance.

• Like any indicator every setup isn’t profitable so you must use your own judgement and other indicators to determine trade setups and their timing.  If you’re interested in the trade setups we see then follow us on Twitter @DownsideHedge or at StockTwits as DownsideHedge, as we don’t post everything we see here on the site (but we always post them to StockTwits and Twitter). As we mentioned above, we post every setup even if it is against the trend so don’t take them as a recommendation to buy or sell.

Here’s the chart of Goldman Sachs (GS) that we annotated for the video.  The annotations are consistent with the charts we post here or on Twitter.

• Green lines mean a long setup for a stock in a long term uptrend.
• For a stock in a down trend a green line represents a point where bearish sentiment is being overwhelmed by the bulls and warns of a counter trend bounce.
• Red lines represent a consolidation warning for a stock in an uptrend (suggesting a counter trend dip).
• For a stock in a down trend a red line would represent a selling opportunity.
• We use a light blue line to signal the end of a consolidation warning or counter trend bounce.  Basically, a light blue line means that the trend appears to be continuing and no trade setups are in place.