Sentiment towards a number of key trading instruments is seeing big changes this week as after Federal Reserve Chair Jerome Powell dropped a key piece of policy language and talked up inflationary risks.
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 are 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 is often a strong indication that the trade could be topping or about to reverse at any time.
I will now look at some the strongest sentiment bias amongst the retail crowd right now. Some of the sentiment skews suggest that current price trends are reaching breaking point and big reversal may be nearing.
USDZAR – Counter Trend
According to the ActivTrader Market Sentiment tool traders remain worryingly short towards the USDZAR pair, despite the fact that the pair is in a strong bull trend, and South Africa is the epicentre of the new COVID-19 variant.
The ActivTrader Market Sentiment tool shows that 70 percent of traders are expecting more losses in the USDZAR pair. The large sentiment bias has actually increased since the COVID-19 variant news.
Traders are also looking past the fact that the FED is tapering and that there is now a clear monetary policy divergence between both countries central banks, meaning that the US dollar has the upper hand on the fundamental front.
USDJPY – Risky Move
The ActivTrader market sentiment tool shows that traders are 78 percent of traders are bearish towards the USDJPY pair, following the big technical reversal from the 115.50 level over the last few days.
Traders are expecting more losses as the risk-off move in global financial markets is causing traders to seek out safe haven currencies, such as the Japanese yen and Swiss Franc currencies.
It must be said that with 78 percent of retail traders should this pair it is a concern, as they are typically on the wrong side of the trade. This leads me to believe that the USDJPY pair could start to recover soon.
Gold – Bullish Bias
Market sentiment towards gold remains wildly bullish at the moment, despite the price of gold getting crushed at the moment. The ActivTrader market sentiment tool showing that some 74 percent of traders currently bullish towards the yellow metal, despite the huge price drop over the last few trading weeks.
Traders need to consider that bullish sentiment towards the metal has been dropping lately, so this is a good sign. Potentially, we are seeing some type of capitulation event towards precious metals before they start to rise again, so a turning point in the metal is possible, but further downside risks are high under $1,800.
