Sentiment towards the major indices is increasingly interesting after last week’s upside explosion in stock prices. Now is a great time to check out some of the most extreme sentiment traders who look for contrarian trading signals via sentiment readings.
The 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 is being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent are considered to be at an extreme level, while market sentiment readings over 80 to 95 percent are often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some of 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.
Dow Jones Industrial Average – Bear Bias
According to the ActivTrader Market Sentiment tool, a large majority of traders are now bearish towards the Dow Jones Industrial Index after last week’s massive price ramp.
The ActivTrader Market Sentiment tool shows that only 33 percent of traders are expecting more upside in the blue-chip heavy index. Given that small buy bias, we usually see the market heading higher under these conditions.
It should be noted that sentiment is very crucial for the DJIA as we typically look to fade extreme sentiment biases in the stock trading industry.
UK100 – Neutral Bias
The ActivTrader market sentiment tool shows that 48 percent of traders are bullish towards the United Kingdom index as UK stocks continue to consolidate.
The sentiment bias certainly alludes to range trading, however there is now huge one-sided sentiment so more range trading could be about to take place.
I think we are in a tough spot if sentiment remains remain neutral, it could hint that this index not done yet with consolidation.
Nasdaq – Bulls flip
Market sentiment towards the Nasdaq, which is a bad sign for bears 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 62 percent of traders currently bullish towards the shiny metal. This is an increase of 10 percent since last week.
I think it is worth noting that the more traders turn bullish the harder it could be for the rally to sustain itself.