Putting sentiment to work
Interpreting headlines and media sentiment isn’t hard, but it does take practice, patience and detailed observation of the daily trend. This is not, however, trading by just wit and gut feel. Practical tools can play a role, and the Chicago Board Options Exchange Volatility Index (VIX) is an excellent one for gauging sentiment (see “Reading the VIX”).
Bear phases generally end with readings of about 35-50 and bull phases around 9-14. If the market is near an old high and the VIX is around 15, obviously it can’t sustain it for long because there is only so far the index can rise. On the other hand, if a market is near an old high and the VIX is around 25, it means a significant slice of the market is discounting the move, which can propel it much higher.
Whether reading the headlines or interpreting the VIX, using these tools is similar to watching the fuel gauge in your car. Fear reigns when the tank is on empty and can go no lower, while greed is highest when the tank is full and can hold no more. The point is that, while technical signals matter, context is everything. Before you can experience long-term trading success, you need a reliable way to identify that context — whether by discretionary analysis of broad sentiment or an objective reading of measures such as the VIX.
Jeff Greenblatt is the author of “Breakthrough Strategies for Predicting Any Market,” editor of the “Fibonacci Forecaster,” director of Lucas Wave International LLC and has been a private trader for the past eight years.