Technical Talk: Keep an eye on sentiment

By Prieur du Plessis, on October 13th, 2009 posted in: Investment, Markets, Money

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The comments below were provided by Kevin Lane of Fusion IQ.

As seen below, the S&P 500 is making another attempt to overcome the convergence of a downtrend line (red line) from the 2007 peak and a resistance area (green line). This is the second time the S&P 500 will attempt to overtake this trend line after testing it on September 23 and then falling by 5,57%.

We will watch the action closely early in the week to see whether the index can surpass this level. If it can’t, a minor double top may come into play. The first support level below the S&P comes into play near 1 022 then 1 000.

Sentiment surveys, such as the American Association of Individual Investors (AAII), are still neutral and doubting as opposed to overly bullish and embracing. Since by and large investor sentiment remains sceptical, while sideline liquidity still remains relatively high, we believe there is a good chance the S&P can take out this trend line and work higher.

Sentiment, both measured and observed, has served us well in calling market direction. Thus, given current readings of sentiment, we remain constructive, though respect the significance of the trend line as a potential supply area.

Source: Kevin Lane, Fusion IQ, October 12, 2009.

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Frank W

October 14, 2009 at 10:12 am

This is interesting. A year or so ago two scholars did a statistical study of the relationship between sentiment and behaviour and found that there was no co-relation whatsoever, either synchronically or in advance. As a third scholar has observed, sentiment has nothing to do with reality. It’s more about day-dreaming and wishful thinking. Take the results of any sentiment survey — positive or negative — with a grain of salt. I myself don’t bother to read them any more. However, don’t ignore trendlines. they are another matter entirely.