The investing crowd is often wrong when it comes to key trend turning points i.e.whether an up or downtrend of the market is about to change. If this is the case, one would want to measure the crowds expectation at potential turning points to identify extreme bullish or bearish markets.
Sentimental analysis does just that. It measures the emotions of the investing crowd in an attempt to identify extreme bullish or bearish indications. Once an extreme level has been identified, a trader can use this information from a contrarian viewpoint either to confirm other trading indicators or as a stand alone indicator.
If an extreme bearish sentiment exists, a contrarian would interpret this as a bullish indicator. If an extreme bullish sentiment exists, a contrarian would interpret this as a bearish indicator. While an extreme sentimental reading can be used as a stand alone indicator to identify possible counter-trend moves, it should only be used as a supplemental indicator for confirmation.
The following example will demonstrate how sentimental indicators can help confirm other trading indicators. Suppose a stock has had a nice run up and is now approaching a...
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