| | | Thanks. My theory is that when the sentiment is positive, uptrends continue and dips become buying opportunity. But when sentiment is negative, any weakness in trend translates into a short selling opportunity. So sentiment creates the setup and price action is the trigger. To this end I am developing a short term sentiment indicator that does not rely on weekly surveys.
Your charts confirm this on intraday basis, but the sample space is too low and this is still a work in progress. But I share what I have so far. In the first chart below, I have marked where your pattern failed to react as well as where the runup ran out of juice and began to return. It is an intraday chart. The other charts are longer term and are there just to show how the sentiment and market tops and bottoms interact.
Interestingly, my algo also marked that pattern completion point as "Cuppy", i.e. cover short and perhaps go long but it didn't pan out because the sentiment was too negative for a rise. The algo soon reversed to sell short because it respects trend above all else. Later, it said that it is "Toppy" and should fall, but by then the sentiment had turned positive and it could not drop.
Once I incorporate the sentiment into my algo, it should do better. From what I see, this theory has an 80+% accuracy, but as I said, needs more work.
SPX intraday 30 minutes
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SPX Daily with the tops and bottoms marked with red/green markers. Pay attention to what the sentiment indicator has been doing prior to the price action.
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SPX 3 day chart to provide a longer term perspective. The thin black line in the indicator is what I call the "mood". Sentiment is the moving average of the mood. On longer term charts mood by itself could be a trigger, but it is still too erratic to rely on.
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