Watching out for sentiment extremes helps you avoid getting "caught up with the crowd"
Simply put, a market sentiment extreme is a situation when most everyone has already taken a bullish or bearish position in a financial asset, leaving almost no one left to buy or sell.
Silver provides an excellent case study.
Let's briefly go back to April 18, 2011, when Elliott Wave International's U.S. Short-Term Update, which provides near-term forecasts for major U.S. financial markets thrice weekly, showed this chart and said:
(Click on images to enlarge)
Just a week later, silver hit a high of $49.91 and in less than three weeks, the price had plummeted 35%.
Now, sentiment measures are not always precise timing indicators. Markets can stay overbought or oversold for a long time. Still, extremes can be quite valuable when used along with the Elliott wave model, which was also signaling a turn in silver's price trend in April 2011.
In the past nine years, silver prices have traded well below their 2011 high, but there have been rallies.
This brings us to 2020.
On May 11, a well-known precious metals website sported this headline:
Silver prices to soar by 40%+, here's the case ...
They proceeded to outline a bullish case that supported their views of even higher silver prices to come.
They may end up being right, however, the May 20 U.S. Short-Term Update showed this chart and said:
Just like back in 2011, today silver's Elliott wave pattern provides even more insight into what to expect next for the precious metal.
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Jun 4, 2020
This article was syndicated by Elliott Wave International and was originally published under the headline Silver: How to Gauge the Crowd's Mindset. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
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