Sentiment towards a number of key trading instruments is changing ahead of Jackson Hole, which promises to be one of the biggest market events for traders this year. Many positional trends are starting to build, making it an even more important time to check out what retail traders are thinking.
Trading sentiment is most effective when retail traders are running counter trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd are being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent is often a strong indication that the trade could be peaking, and about to reverse at any time. With that said, I will now look at some the strongest sentiment trades amongst the retail crowd right now.
According to the ActivTrader Market Sentiment tool some 872percent of traders are currently bearish towards the USA500 ahead of Jackson Hole, despite the ongoing massive breakout and weekly recovery in the S&P500.
The bearish sentiment skew suggests that further gains are possible. We should also consider that the fundamentals suggest that the FED will not announce tapering and that stocks are going to rally.
The USA500 has been in rapid breakout mode, making higher highs and even new all-time highs. Being short the USA500 without a clear technical breakdown is very risky.
EURUSD – Fighting the Trend
The ActivTrader market sentiment tool shows that traders are 70 percent bullish despite the EURUSD pair’s inability to rally above the 1.1800 resistance level and forming lower highs in the short-term.
EURUSD bulls have been hurt recently, so running counter trend against the EURUSD pair is very risky right now. Due to the notion that the FED will not announce tapering, it remains to be seen if the herd is wrong at this juncture.
If we combine the technicals, the EURUSD pairs needs to break above the 1.1800 level to get past the technical stalemate, meaning that rallies will no longer be for selling.
Brent Oil – Dip Buying
Market sentiment towards the Brent is overwhelmingly bullish right now, with 76 percent of traders bullish towards Brent oil, as the strong weekly recovery encourages buyers into the market.
With the overall trend and dip-buying being very strong, retail traders may be on the right side of the market. However, we could see some serious volatility, and indeed some type of two-way price gyrations to shake-out the week longs.