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In this article I am going to be looking at retail market sentiment after the recent Federal Open Market Committee policy decision, which investors, hedge funds, pension funds, and traders often use as a key gauge of the global economy.
Today I am going to be using the reliable Market Sentiment tool on the ActivTrader platform in order to determine how traders are positioned in the foreign exchange, equity, metals, and commodity markets.
Before we look at sentiment, and how traders are positioned it is important to note that the Market Sentiment tool is best used as a contraction indicator. For example, when traders are fighting against established trends the indicator offers a warning sign that the trend may be set to continue.
Another useful technique in incorporating the Market Sentiment tool into your trading is to look for record high or record low readings. For example, if a large amount of traders, saying 75 percent, are bullish towards a trading instrument this means that the trade may be becoming way too overcrowded.
The same is also true in the opposite direction. If a sizable amount of traders are short an instrument, say 75 percent or more, then it is considered overcrowded. Readings over 90 should be considered sentiment extremes, and a major red flag.
Neutral readings provide us with an indication that range bound conditions are likely to persists in the near-term. The longer that sentiment remains neutral then there is more likelihood that the majority of trading action and directional breakouts are probably going to be taking place elsewhere in the market.
US Dollar Index Market Sentiment
Traders sentiment towards the US dollar index is currently neutral, which implies that a major directional breakout is still far away in the short-term. Once we see a major shift in one direction it could time to fade that opinion.
Personally, I believe that the US dollar index could start to push higher this quarter. However, this current Market Sentiment reading suggests that the timing for the move is still not quite there yet.
It may also help to look to for sentiment skews in pairs that make up heavy weightings inside the US dollar index such as EURUSD and USDJPY.
FTSE 100 Market Sentiment
The Market Sentiment Indicator shows that 79% of traders are currently long the FTSE100. It is important to note that the UK100 is in a bullish trend and has been moving higher since the start of the year.
The bullish skew in the FTSE 100 does suggest that retail traders may be on the wrong side of the trade in the short-term, because the FTSE100 has started to move sharply lower over recent days.
Overall, with such a one-sided skew it may be prudent to let sentiment neutralize before becoming bullish towards the UK100 in the short-term.
Silver Market Sentiment
Looking at the sentiment for silver at the moment it suggests that traders are increasingly bullish towards the metal. Traders appear to be on the right side of the trade in the short-term, as silver prices have staged a major rally.
Typically, when traders are on the correct side they tend to exit positions too early or indeed book profits way too early thinking that the trade will reverse.
It will be interesting to see if silver sentiment decreases if the price continues to rise. Overall, now may be a good time to buy silver, as a new short and medium-term bullish trend may be forming.
Coffee Market Sentiment
The current sentiment skew towards Coffee is fascinating on many levels. Over 85 percent of traders are currently bullish towards Coffee, meaning that this trade is starting to look crowded.
Coffee has not staged a major breakout yet, although the fundamentals towards Coffee are bullish, due to weather and inflationary pressures on the global economy. Potentially, COVID-19 may be the only factor holding Coffee prices back, due to consumption fears..
This overly bullish skew is worth watching. If this persists and Coffee prices start to falter it may be a sign that major down move is going to take place. Overall, I remained concerned by the overly high sentiment, as there is no major bullish breakout in play.
