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Saturday, July 7, 2012

Why Sentiment Matters


The Wall Street Sentiment Survey* is unique in that the poll is taken on Friday after the market closes, and it asks participants for their forecast for the following week. This differs from other polls that take opinions through the week during periods when the market is active and changing.
Last week's survey results (June 29 cutoff) were surprisingly one sided with 80% bulls versus 20% bears.
Chart
Sentiment indicators are contrarian, so with that many bulls, there was a pretty good chance that prices would close down this week, which they did, thanks to Friday's selloff.
Another point worth noting is typical price behavior after a climax. Eighty percent bulls is a climactic reading, so we normally expect a short-term top to form within a few days. After a few days of consolidation, it is possible for the rally to continue, but this week's price top has set up an ascending wedge pattern, which has bearish implications -- the rising trend line will probably be violated.
Conclusion: Climaxes can initiate a move to higher prices or signal that a move has been exhausted. In this instance it appears that the latter is the case.
*Wall Street Sentiment Survey data are provided courtesy of Mark Young of Equity Guardian Group. Data are complied from the results of a weekly survey of a group of experienced traders and technically oriented market analysts with a diverse set of analytical disciplines, originally nicknamed 'The Fearless Forecasters' from Mark's message board at traders-Talk.com. Polling is conducted after the market close on Friday, and the results are normally published late Saturday. The poll asks participants for their forecast for the next week -- bull, bear, or neutral. You can find more information on Mark Young's sentiment work at WallStreetSentiment.com.
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Technical analysis is a windsock, not a crystal ball. 

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