Sentiment towards a number of key trading instruments is seeing big changes as the US dollar bull trend accelerates and Federal Reserve Chair Jerome Powell retains the top job at the US central bank.
The trading sentiment is most effective when retail traders are running counter-trend, meaning that they are heavily leaning against established market trends and in increasingly large numbers. Additionally, once big sentiment skews build it can be a powerful sign that the retail crowd is being too one-sided.
Typically, market sentiment readings for an instrument that has reached around 75 to 80 percent is considered to be at an extreme level, while market sentiment readings over 80 to 95 percent are often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some of the strongest sentiment biases amongst the retail crowd right now. Some of the sentiment skews suggest that the current price trends in stocks, FX, and commodities could accelerate.
AUDNZD – In Disbelief
According to the ActivTrader Market Sentiment tool traders remain worryingly long towards the AUDNZD pair, despite the fact that RBNZ bank decided to implement its second interest rate hike this year as it hiked rates by 0.25% to 0.75%.
The ActivTrader Market Sentiment tool shows that 82 percent of traders are expecting more upside in the AUDNZD pair. The large sentiment bias has actually increased since last week as the kiwi remains muted on the FX market.
Traders may not have priced the recent hike into the kiwi so being bearish against the New Zealand dollar is very risky, especially since the RBNZ also maintained that the economy is doing well as the country reopens, so more hikes could be coming.
USDJPY – Bears Getting Crushed
The ActivTrader market sentiment tool shows that traders are 91 percent of traders are bearish towards the USDJPY pair, despite the big technical breakout above the 114.70 level over the last few days.
Traders are unlikely to be happy as the pair continues to accelerate to the upside. The technicals clearly show that the USDJPY pair could be headed to the 116-level next, which is likely to cause more pain for retail traders.
While we see sentiment this extremely bearish sentiment we need to consider that the short squeeze could just be warming up, and it could be a warning sign that now is not the time to add to shorts.
US30 – One To Watch
Market sentiment towards the US30 is very interesting right now, as the Dow Jones Industrial Average index attempts to recover above the 600 level, following the recent bounce from the 35,550 area.
The ActivTrades market sentiment tool showing that some 72 percent of traders currently bullish towards the index, despite the index remaining unstable over the last few trading weeks.
Traders need to consider that the signals are still fairly mixed for the DJIA at the moment. A Christmas rally towards 17,000 could be on the cards for the DJIA, but it is still a close call at this juncture in time.
