Sentiment towards a number of European indices is critical as EU stocks attempt to hold onto recent gains. 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 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.
NASDAQ – High reading
According to the ActivTrader Market Sentiment tool a large majority of traders are still bullish towards the Nasdaq as continues to trade below the 11,000-resistance level.
The ActivTrader Market Sentiment tool shows that only 30 percent of traders are expecting more downside in the leading United States tech Index. This is a large increase since the previous trading week.
It should be noted that sentiment is very crucial for the Nasdaq as we typically look to fade extreme sentiment biases in the stock trading industry.
UK100 – Declining sentiment
The ActivTrader market sentiment tool shows that only 16 percent of traders are bullish towards the FTSE100 as it continues to race higher as UK stocks undergo a post-Santa rally.
The sentiment bias certainly alludes to more upside trading, however, it is important to state that bearish sentiment has increased by around 30 percent since last week.
I think we are about to see more gains in the UK100 as traders are caught being extremely short and extremely bearish into the new year.
USA500 – Range bound
Market sentiment towards the USA500 is neutral right now, which is a bad sign for bulls and bears as one-sided sentiment skews tends to mean directional breakouts.
The ActivTrader market sentiment tool showing that only 50 percent of traders currently bullish towards the widely trading index and 50 percent bearish.
I think it is worth noting that the more traders turn bullish or bearish then we should expect the opposite price effect to happen.