Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
2019’s Hottest Commodity Is About To Explode - 15th Oct 18
Keep A Proper Perspective About Stock Market Recent Move - 15th Oct 18
Is the Stocks Bull Dead? - 15th Oct 18
Stock Market Bottoms are a Process - 15th Oct 18
Fed is Doing More Than Just Raising Rates - 14th Oct 18
Stock Markets Last Cheap Sector - Gold - 14th Oct 18
Next Points for Crude Oil Bears - 13th Oct 18
Stock Market Crash: Time to Buy Stocks? - 12th Oct 18
Sheffield Best Secondary School Clusters for 2018-19 Place Applications - 12th Oct 18
Trump’s Tariffs Echo US Trade Policy That Led to the Great Depression - 12th Oct 18
US Dollar Engulfing Bearish Pattern Warns Of Dollar Weakness - 12th Oct 18
Stock Market Storm Crash, Dow Plunges to Trend Forecast! - 12th Oct 18
SP500 Stock Market Sell Off Well Forecast by President Trump - 11th Oct 18
USD and US Tr. Yields Retreat, GBP Gains on Brexit-deal Report - 11th Oct 18
Loss Of Yield Curve "Shock Absorber" Could Mean A Rough Ride Ahead For Markets & Housing - 11th Oct 18
Just How Bearish is the Stock Market’s Breadth? - 11th Oct 18
Here’s Why Gold Stocks, Gold, and Silver Are Great Buys Now - 10th Oct 18
Russian Ruble Technical Chart Analysis and Forecast - 10th Oct 18
Society Trends To Keep in Mind in the USA - 10th Oct 18
[eBook] How to Identify Turning Points in the Market - 10th Oct 18
Euro Vulnerable as Slowing Growth Reveals Underlying Issues - 9th Oct 18
Construction Companies to Watch For in 2019 - 9th Oct 18
ECB Meeting Minutes and US Inflation Data in Focus - 9th Oct 18
Interest Rate Shock-Time to Find Out Who has been Swimming Naked - 9th Oct 18
Unintended Consequences of Expanding Sheffield's Best Ranking State Secondary Schools - 9th Oct 18
Crude Oil Price Trend Forecast 2018 Update - 9th Oct 18
Inflation Is Starting To Heat Up - 8th Oct 18
Stock Market Seasonal Influence at Work - 8th Oct 18
Barrick Randgold Deal Breathes New Life into Gold - 8th Oct 18
Stock Market Sell Off, Dollar Rally Expected, Now What? - 8th Oct 18
The Chartology of Gold and Silver - 8th Oct 18
The Income for Life Playbook - 8th Oct 18

Market Oracle FREE Newsletter

Trading Any Market

Stocks: When "Sentiment is Strikingly Suited" for a Major Stock Market Event

Stock-Markets / Stock Markets 2018 Jul 25, 2018 - 02:08 PM GMT

By: EWI

Stock-Markets

What an extreme use of leverage tells you about the trend

Stock market history shows that when the Elliott wave model of stock market patterns and market bullish/bearish sentiment indicators are aligned, you have the basis for a high-confidence forecast.

That was the exact situation back in January, right before the stock market's jarring sell-off, from which stocks still haven't quite recovered.


Let's start with a brief review of Elliott Wave International's analysis of the DJIA's Elliott wave chart pattern. On Jan. 5, the Elliott Wave Financial Forecast noted:

The wave structure of the advance looks mature ....

Mature, as in -- we could clearly see a 5-wave price pattern on DJIA charts. When a fifth wave ends, a move in the opposite direction begins.

Indeed, just three weeks later, the DJIA hit a peak of 26,617. As you'll recall, a period of wild volatility shortly followed.


Jump on once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming. We can help you prepare for opportunities and side step risks that will surprise most investors. You can get deeper insights in Elliott Wave International's new free report: 5 "Tells" that the Markets Are About to Reverse. The insights that you'll gain are especially applicable to the price patterns of key financial markets, including the stock market, now. Read the free report now.


What also helped the Elliott Wave Financial Forecast make the call was the extreme bullish reading in the stock market's sentiment measures, which supported the view that the DJIA's "advance looks mature":

Sentiment is strikingly suited for the end of an advance.

Realize that sentiment is "suited for the end of an advance" when it reaches an extreme bullish reading. In a nutshell, when everyone is bullish, everyone has already bought, so the price cannot move any higher. The opposite is true at the end of a prolonged downturn.

Now, let's proceed with the details of key sentiment measures from around the start of 2018.

This chart and commentary is also from the January Financial Forecast (Elliott wave labels available to subscribers):

The chart shows the National Association of Active Investment Managers' Equity Exposure index. NAAIM's index hit a record high of 109.4 the week of December 11. Since 100 equates to a 100% invested position, this means that NAAIM portfolios were leveraged long to a record degree. As noted above, the extreme use of leverage represents a heightened state of expectation, as it means that buyers of stock are so confident in an advance that they are willing to borrow money to bet on rising share prices. [Emphasis added.]

Another January Financial Forecast chart with accompanying commentary sheds more light on the prevailing sentiment just before the DJIA's January 26 peak:

Last month we showed a chart of the Rydex Total Leveraged Bull/Bear Ratio through November. With leveraged-long Rydex assets more than 14.4 times as great as leveraged-short assets, the ratio tied the prior record extreme registered in late 2014. In December, the ratio shattered that record with a surge to 18.6, a boost of 29% from the November high, as shown by the lower graph on the chart. The middle line on the graph shows an even more breathtaking spike in Rydex's Bull/Bear Ratio (unleveraged). The ratio jumped to 22 on December 29, easily the most extreme reading in the 16-year history of the data. [Emphaisis added.]

So, as you might imagine, our Elliott Wave Financial Forecast editors were not surprised by the DJIA's peak (26,617) just three weeks later.

Regarding the details of EWI's technical analysis at the time, we encourage you to see them for yourself in a new free report that remains relevant now (see below).

The January setup will repeat itself, and having the knowledge of what to look for can help you avoid getting caught unprepared -- as well as capturing opportunities that every market reversal presents.

Read the free report now -- just look for the quick-access details below.

Learn how to spot once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming

We can help you learn how to spot opportunities and side step risks that will surprise most investors.

You can get deeper insights in Elliott Wave International's new free report: 5 "Tells" that the Markets Are About to Reverse.

The insights that you'll gain are especially applicable to the price patterns of key financial markets, including the stock market, now.

Read the free report now.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: When "Sentiment is Strikingly Suited" for a Major Stock Market Event. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules