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Sentiment towards a number of key trading instruments is seeing big changes ahead of next week’s Federal Reserve policy meeting, where FED Chair Jerome Powell is expected to implement more QE tapering and talk up the need for a rate hike.
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.
EURSD – Fighting The Trend
According to the ActivTrader Market Sentiment tool traders remain overly bullish towards the EURUSD pair, despite the fact that the pair is in a strong bear trend, and the greenback is in breakout mode.
The ActivTrader Market Sentiment tool shows that 77 percent of traders are expecting more upside in the EURUSD pair. This large sentiment bias could be hinting that a big down move is coming.
Traders are also looking past the fact that the FED is expected to announce more tapering next week and that there is now a clear monetary policy divergence between the ECB and the United States central banks.
Silver – Too bullish
The ActivTrader market sentiment tool shows that traders are 94 percent of traders are bullish towards higher silver prices, despite the big technical reversal from the 1.2250 level over the last few days.
Traders are clearly looking for more gains in the shiny metal amidst sky high inflation and are expecting more investors and traders to seek out safe haven metals, such as gold and silvers to fight inflation.
It must be said that with 94 percent of retail traders being bullish is a big concern, as they are typically on the wrong side of the trade and trend. This leads me to believe that silver could start crash soon.
ESP35 – Strangely Bullish
Market sentiment towards the ESP35, the leading Spanish index remain exceptionally bullish at the moment, despite the uncertainty towards the Omicron variant and the damage it could do to the Spanish and eurozone economy.
The ActivTrader market sentiment tool showing that some 88 percent of traders currently bullish towards the index, despite the worrying price drop last week, which saw massive amount of value wiped from Spanish stocks.
Traders need to consider that bullish sentiment towards the index has increased a lot lately, so this is a bad sign. Potentially, we are seeing some type of euphoria, so I am worried about some type of capitulation event in stocks soon.
