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Now is a great time to check out the top sentiment trades as the mood switches towards a number of key asset classes after last week’s Federal Open Market Committee meeting showed a clear hawkish tilt amongst the central bank of the world’s largest economy.
The sentiment shift underway in some asset classes has been very dramatic since the FED’s policy meeting. One of the best ways to use sentiment in trading is to watch for overcrowded trades that are running counter trend.
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.
Neutral reading typically indicate indecision or point to more range bound conditions, while sudden shifts in sentiment can potentially mark trend reversals. With that said, I take look at some the strongest sentiment trades amongst the retail crowd right now.
CAC40 – Bullish Skew
According to the ActivTrader Market Sentiment tool some 80 percent of traders are currently bullish towards the CAC40 right. This is not all that surprising as the leading French index hit a new all-time high just last week.
The ActivTrader market sentiment tool can be a great counter signal tool. The current sentiment skew suggests that traders believe that the index will continue to rise at any cost, thus leaving them exposed to more pullbacks.
It is fair to say that traders are currently on the right side of the trend, however, the 80 percent bullish skew does make me nervous that a long squeeze could happen and a deeper pullback under 6,600 may be on the horizon.
COFFEE – On Trend
The ActivTrades market sentiment tool shows that traders are ultra-bullish towards the price of Coffee right now, with only 1 percent of traders bearish towards the ever popular and widely consumed drink.
It should be noted that this sentiment extreme is one of the largest that I have ever seen and is issuing a major warning that coffee could pullback further at any time. Last week Coffee pulled back sharply after the FOMC meeting and may yet to have found a price floor.
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I would also like to add that the weekly chart of Coffee is hugely bullish right now and we may well see Coffee exploding to the upside over the long-term horizon.
Retail traders are not always wrong, although habits such as exiting winning positions or exiting the trend too early are common. I am expecting higher Coffee price, but I am fearful while 99 percent traders are bullish.
CADJPY – Getting Overcrowded
Market sentiment towards the CADJPY pair has reached extreme levels, with the ActivTrader platform currently showing that 87 percent of traders are bearish towards the CADJPY pair. Traders are growing more bearish despite the pairs major recovery this week and Japanese yen inability to rally.
The retail crowd have been ultra-bearish towards the CADJPY pair recently, and especially since last week massive price drop. Caution is advised as the pair could bounce back sharply after decline from the 91.25 to 87.95 level last week.
Sentiment aside, the weekly chart shows that a multi-year trendline breakout could take place if the CADJPY pair trades above the 91.00 level this week. If traders remain extremely bearish and the price breaches the trendline, playing contrarian may not be such a bad idea.
