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This is why market sentiment is supreme

Last time, I explained at length why your views are not nearly as important in forecasting the price path as that of the other traders.  Unless you have more funds available than hedge funds, central banks and governments put together, your trading will have precious little impact on the current price.

So who sets the price? This is a common question among the unsophisticated.  There is no ‘who’ here.  In public markets (the ones we trade), prices are set by the constant ebb and flow of buy and sell orders.  If the buyers are more urgent, the next price will be higher and vice versa.  It’s as simple as that.

So what makes the buyers more urgent than the sellers?  Of course, the buyers want to buy at the lowest price available and the sellers want to receive the highest price available.  That is basic human nature. In my mind, the elemental impetus behind the buyers feeling more urgency to buy than the sellers feeling less urgency to sell is the buyers’ unconscious feeling that if they do not act now, the price may be even higher later on.  It’s the FOMO effect (Fear Of Missing Out).

The sellers, on the other hand, want the price to rise and so an agreement is reached that the price should rise – and it does!

But when a trend has become stretched in one direction, these bullish feelings of the buyers turn to certainty the trend will continue. But at some stage though, the urgency of the new buyers starts to wear out as there are fewer buyers to attract.  Also, some savvy traders will decide to take some profits and sell as well as more top-pickers enter as sellers.

Around this point, measures of bullish sentiment will have reached a maximum. So instead of this indicating a trend continuation (as most believe), it more often signals a market high – or even a major top.

And that is the position many markets are facing today.  So let’s look at a few major ones.

 

US Treasuries

The fact that the 10-yr Note yield has reached the 3% level (from a low base two years ago) has been splashed all over the MSM.  Of course, there had been very little coverage there for the two years during the rise. But now, there appears many warnings that at 3%, this is putting debt-laden economies in peril from rising interest payments (that have almost doubled in two years).  And with the Fed’s stated intention of draining dollar liquidity, interest rates can only rise further  – right?

This is the line that is fed to MSM readers, but my Headline Indicator is flashing red – and here’s why. This is the multi-year chart of US 10-yr yields from 1980

The market has been in a downtrend of 36 years – a clear sign that economies have been over-supplied with funds while demand has lagged. In spite of all the QE, ZIRP. NIRP operations by major central banks, supply has out-stripped demand for almost 40 years. That has built up a massive debt pile, of course.

But the game is changing.  Central banks are now reversing QE to bring the diminishing supply of new credit into line with demand. That will put strong  upward pressure on the dollar, as m ost global debt is denominated in the reserve currency.

I have a superb tramline pair with multiple accurate touch points and now the market is testing the upper resistance.

Most are calling for a continued rise in yields, but I believe the marketwill disappoint the majority (again) by pulling back into the trading channel first. That is because bullish sentiment is at a nine-year high and we have completed a major five wave pattern down in prices.

Yesterday, the market staged the biggest bounce in a very long time – and likely signaled a major counter-trend rally has kicked off.

The extreme bullish sentiment picture supports this view with COT data showing hedge funds hold a record net short position in futures and options.  Time to give them a surprise!

 

US Dollar

I have been bullish the dollar for some weeks and this is the picture on the weekly

As the market approached the Fibonacci 62% support in February, I believed the downtrend had completed a five down to the 88 area and advised Club members to go long.  That was when DSI bullish dollar sentiment had reached a lowly 8%.  The vast majority were extremely bearish on the dollar.  But that was a terrific buying opportunity as the market has rallied to the 93 area in three months (where we are taking profits).

But in the three months, traders have suddenly fallen in love with the greenback so that bullish sentiment has rocketed to the 91% level (a 16-month high).  Fickle creatures, aren’t they?

So do you think it has plenty of room to surge further ahead, given that everyone believes it?

That is certainly not my interpretation and I expect a pull-back of some size shortly.

But in the space of three months from bulls being at 8% to 91%, the market has only rallied a relatively short distance (although very profitable!) which means the bulls have spent an awful lot of firepower to not even reach the wave 4 high.

So the bulls need a lot more recruits to keep the run alive, but where are they to come from?.  That is another reason why I believe we are in for a pull-back so as to attract more bears who see this rally as a great opportunity to take short positions at better prices.  And when the market turns back up, they will be forced to cover their shorts in another short squeeze that forces them to buy.

 

Gold/Silver

Both had a sharp decline on Tuesday but that was a third wave and it is now finishing up the final fifth wave before a renewed push

I have a good tramline pair with an “overshoot” in wave 3 which is typical as the supercharged selling in a third wave overdoes the effect.

But note the current DSI bulls only number 10% which is extremely low for this metal as the perennial gold bugs must be in hibernation.  Also, the COT data shows the hedge funds have massively reduced their net long position and only hold a relatively modest 1.8 – to 1 long futures.

If gold rallies from here or perhaps from a bit lower, it would fit in very well with this sentiment picture.

Silver has been performing much better than gold in recent weeks – another forecast that is panning  out

Basically, silver has been trendless but coiling up inside my wedge since last year.  When it breaks out, the move is likely to be violent.  Note that last week’s plunge only took it to support at the lower wedge line.  I noted for Club members that a break there would not be good for my bullish case.  In fact, there has been a nice bounce and with  only 10% bulls, more upside is likely.

So here I have presented four major markets that appear to be on the turn – all with extreme sentiment readings (and complete Elliott wave patters).  The market swings clearly are formed from highs where bullish sentiment is high to the lows where it bullish sentiment is low.  This pattern repeats time after time – and will continue to do so for as long as we have public markets that are traded by humans.

Many say that with AI bots proliferating, trading will be less emotional and not subject to herding.  I do not believe that – for one thing, they are programmed to herd. A contrarian trader/bot will quickly find they are on the scrapheap if they swim against the tide of their peers and produce huge losses.

Incidentally, last week saw a huge leap in Ocado shares that trapped many hedge fund shorts.  There was a massive short covering frenzy on Thursday. Here is the chart

This is/was one of the most heavily shorted shares in London, but with the chart showing a clear uptrend since at least last year, what were the hedge funds smoking to become a bear? This is clearly a bull market so why short it?  Of course, I know the answer – because they were thinking in ‘fundamental’ terms, not technical.

They were seduced by the idea that the company has spent millions and shows no profit at all.  If they looked over at Tesla (same profile), they would see another solid bull trend with no earnings or dividend.

If hedge funds keep making these expensive errors, how do they stay in business?  It is a mystery alright.

Meanwhile, VIP Traders Club members are very much in business as we keep taking money off them.  Thanks, guys.

 

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