The Changing Sentiment in Price Action Alone

• Posted by Greg Harmon
• on October 16th, 2014

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Last night I did a webinar hosted by Keith Kerns, discussing signs of market sentiment. My friend Ryan Detrick was there as well and he set the stage for me with his awesome statistics on sentiment. How do you follow Ryan on sentiment?

So when it came to me, I turned to the how to find it in the charts from price action. And there were plenty of examples in Thursday’s market. Here are a few I highlighted.

It started in Bonds. The Bond ETF ($TLT) rocketed higher in the premarket, creating the gap in the chart above. After the open it continued higher but stalled as the RSI on the 5 min chart went over 93. A blow off top in the making. The second candle confirmed it as did the massive volume. This was your first clue that sentiment in bonds was changing, and that might be a good thing for equities.

The second signal came quickly after as the Russell 2000 ETF, $IWM, opened down and traded lower. This completed a bullish Butterfly harmonic pattern. Harmonics are derived from Fibonacci ratios, common in nature and pleasing to the human eye. They make the price action look and feel right. Yeah, I know, I’m crazy. But the price dipped below the trigger point and then rocketed higher, printing a bullish engulfing candle on the day. This shows strong buying pressure, positive sentiment.

The final sentiment picture comes from the S&P 500 ETF, $SPY, above. It could be the Nasdaq 100 ETF, $QQQ as well. Both look the same with the major difference that the QQQ is just touching its 200 day moving average. The SPY shows rising volume on the pullback over September and the first half of October. This exploded today though. It also shows the momentum indicator, RSI leveling as it touches oversold territory. The candlestick, a Hammer, indicates a potential reversal as many know. But the picture it represents is quite compelling. The SPY opened with a gap lower and proceeded to get crushed, before buyers ripped it back higher to end the day only marginally lower on very high volume. If this does not scream a change in sentiment to you then you need to relearn your technical analysis.

All of these signals combined suggest that there may be some upside for equities in the future. It may not start Friday but continued action like this will reinforce the idea of a reversal. Will it be back to the prior highs or just for 3 days and then fall again? I do not know, nobody does. But sentiment may be changing for right now. Be cautious and use stops, but prepare for possible upside in the market.

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