Chapter

23

Sentiment Indicators and

Contrary Opinion 

L e a r nIn g O b j eCtIv eS

After studying this chapter, you should be able to:

■ Understand the meaning of market sentiment and implications

■ Apply technical analysis to sentiment data effectively

■ Distinguish between the well‐informed and under‐informed participants

■ Identify market tops and bottoms using sentiment indicators

■ Gauge market sentiment using opinion polls

M

arket sentiment offers the practitioner additional insight into the underlying fac-

tors that drive the markets. It is the study of the actions and opinions of market

participants. It focuses on the behavioral dynamics that accompany the formations

of market tops and bottoms. In this chapter, we will be discussing various sentiment

indicators and how they provide an early indication of potential market turns.

23.1 Assessing the Emotion and Psychology of Market Participants

Market sentiment represents the overall view and emotions of all participants

about the market environment, with particular regard for the degrees of pessimism

and optimism displayed by its participants through their actions and opinions.

The study of its participants’ emotions, beliefs, expectations, biases, and

overall psychology especially during highly or overly emotional periods in the

markets and their subsequent reactions help identify consistent patterns of be-

havioral excess. These patterns of behavioral excess are reflected in the action of

the participants by the way they risk capital in the markets during such highly