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Complacency Becoming The Crowded Trade

This post is only going to make half sense to you because you don’t know where I’m getting my data, but just for the moment accept that there is data. There where is really irrelevant, it’s the what do I do with the information that’s important. Today marked the 4th time that my proprietary selling pressure (indicating complacency) reached a certain key level. These levels are indicated by the 4 dates below. It only goes back this far because that is as far back I’ve been tracking this data so this is all we have to work with for now.

What I’m trying to do is decide what I can deduce from this information and it’s not a whole lot, but I still feel it’s somewhat important given the extreme sentiment readers we’ve been registering across many different sources for the past few weeks. In two instances below the market barely corrected and plowed much higher and in the 1.05 case, the market did suffer a 8% correction before eventually heading higher.

If I had to come to any sort of a conclusion (and trust me I am going somewhere with this) is that it matters what the market has down 4-6 months prior to the signal, so that one can determine how the market is going to behave after the signal.

If the market has been very strong and not paused properly, the first complacent signal may be a fake-out and could actually be looked at as a sign of strength in the market. Therefore one should not to be to quick to turn bearish and continue to focus on the long trade. However, once a signal is triggered and the markets fail to pause, it may be wise to give the 2nd signal a higher importance on the scales of oversold/overbought, and conclude that a deeper correction could be coming.

I believe that is where we could be at as today comes to a close. Of course I should know more with another 12 months of data, but if we always waited around for the perfect amount of metrics to analyze, we’d never get anything done.

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