Sentiment towards several leading indices is changing, due to the market perception of growth and inflation switching amidst the Shanghai lockdown and better data points from leading western economies. Now is a great time to check out how traders feel about some of the top indices, as they look for contrarian trading signals via sentiment readings.
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 topping or about to reverse at any time.
I will now look at some the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends in FX, stocks, and precious metals are breaking point and big moves may be nearing.
FTSE100 – Upside Ahead
According to the ActivTrader Market Sentiment tool traders a large majority of traders are now turning bearish towards the FTSE100, despite the index looking rock-solid above the 7,500-support area.
The ActivTrader Market Sentiment tool shows that 64 percent of traders are expecting more downside in the leading UK index. Given the bearish bias, sentiment is basically warning that more upside is coming.
I think the technicals are very good for the UK100 and the index could easily move back towards the 7,700 level. Couple this with the bearish sentiment bias, I think the upside could be even more dramatic.
Nasdaq 100 – Very Bullish
The ActivTrader market sentiment tool shows that 80 percent of traders are bullish towards the Nasdaq, following its recent large price drop towards the 13,700-price region earlier this week.
Traders are still expecting more gains, with 80 percent of traders bullish according to the ActivTrader platform. Given that retail traders are usually on the wrong side of the trade, this could get very painful for bullish.
In order for the bulls to be right, we really need to see the Nasdaq rally towards the 14,500 level. This would probably signal that the worst is over for tech heavy US index in the short to medium-term.
Nikkei225 – Strong Bias
Market sentiment towards the Nikkei225 is becoming more bullish, which is not very surprising given that the yen is falling, and that typically benefits Japanese manufactures in the short to medium-term.
The ActivTrader market sentiment tool showing that some 84 percent of traders currently bullish towards the leading Japanese index, meaning that retail is on the whole, starting to turn very bullish.
I think that the current sentiment is worrying, especially if we consider that the USDJPY pair has a substantial amount of downside potential. Typically, the USDJPY and the Nikkie225 move in tandem.