Sentiment is used as a contrarian indicator for the stock market. When it reaches extreme bullish or bearish readings, one must anticipate a reversal is close at hand. But it is not just sentiment that will reverse the trend. It is the “price reaction” that follows, which determines whether or not a tradable top/bottom is in place.
TRIANGLE STILL IN PLAY
The S&P 500 (SPX) continues to try and work off the 100% bullish sentiment reading from September 19th (that is bearish for the markets). We did get a price reaction with that extreme sentiment reading and the ascending triangle we pointed out last week is still in play so far.
VOLATILITY
The wild swings in both directions since that sentiment extreme, has not allowed the markets to fully relieve that extreme sentiment pressure yet. But the SPX is closing in on the bottom of the ascending triangle which could find some buyers. A break may trigger some fear, which could line up with an extreme bearish sentiment reading in the coming weeks.
SENTIMENT CYCLES
These sentiment cycles have a historic fingerprint that repeats over and over again. It will take time to move from extreme bullish sentiment readings like we saw, to an extreme bearish sentiment reading. But when we start to see the tape move hard in either direction, we often see sentiment spike or drops just as fast. That is why we have to monitor the sentiment each day-to see exactly where we are at all times.
LOOKING AHEAD
Expect some bounces (1665 makes sense) as we will not go straight down. But until we get that bearish sentiment extreme, shorting rallies is the safest trade for now.
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