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Sentiment towards some of the major indices is changing fasting after the midterm elections. Now is a great time to check out some of the most extreme sentiment traders who 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.
USATEC – Heavily bull
According to the ActivTrader Market Sentiment tool a large majority of traders are now bullish towards the Nasdaq after the recent midterm US election results..
The ActivTrader Market Sentiment tool shows that 79 percent of traders are expecting more gains in the tech heavy index. Given that an extreme bullish bias is in play it is possible we will soon see more downside.
It should be noted that sentiment is very important for important for the stocks as retail traders tend to be on the wrong side of the trend.
UK100 – Too bullish
The ActivTrader market sentiment tool shows that 87 percent of traders are bullish towards the index, marking a steady rise in sentiment since last week.
The UK100 is seen as a major bellwether for the UK economy, so with traders turning more bullish it is quite worrying given that it is normally not a good sign.
I think we are in a tough spot if sentiment remains this bullish it could hint that this index is not done yet with the downside.
GER40 – Still bearish
Market sentiment towards the GER40 is very bearish, which is a good sign for bulls as one-sided sentiment skews tends to mean the opposite in terms of what traders are expecting.
The ActivTrader market sentiment tool showing that only 64 percent of traders currently bearish towards the leading German index.
Due to inflationary and political threats in Germany it is not likely that the index could drop anytime soon, however, it could turn lower and be a sell on rallies.
