Online Subjective Analysis Lesson

When market opinion becomes one sided, and most of the public is either bullish or bearish, an important change of trend may be developing. The reasoning is simple. If everyone is long, and therefore bullish on the prospects of the market, there is no one left to buy. The market can only go lower as some investors begin to sell. The same holds true on the downside, but in this case everyone is either short or out of the market. Since there is no selling left in the market, the market can only go up. There were few bears in the stock market in 1929 before the great crash, and perhaps even fewer bulls in 1932 before the extended bull market.

Some astute traders use sentiment indicators to monitor the prevailing opinions of market participants. These sentiment indicators may be the opinions of market players or recommendations of analysts and market services. A consensus opinion in either direction is often considered a prelude to a change in trend of the market. The stronger the opinions and sentiment indicators in one direction, the greater the reversals in trend in the other direction.