How to Perform Market Sentiment Analysis with Indicators (Part 2)
In part 1, we have learned what market sentiment is and why it is relevant to the market. In this article, we will talk about ways we can measure and analyse market sentiment.
Investors that perform analysis on market sentiment attempt to seek profits by finding assets that are overvalued or undervalued in relation to the market's sentiment. It is being used in many trading strategies. It is widely considered bad practise to solely rely on one type of analysis or indicator. Therefore, often a mixture of different types of analysis, such as technical analysis or fundamental analysis, is performed to help traders and investors make informed decisions.
Bullish Percent Index (BPI)
Developed by Abe Cohen in the 1950s, the Bullish Percent Index (BPI) is an indicator based on bullish patterns generated based on point-and-figure charts from a collection of assets. Whenever the underlying patterns generate buying or selling signals, the indicator will increase or decrease. When the BPI reads 50%, sentiment is considered bullish. A reading of 80% or higher indicates extreme optimism and indicates that assets are overbought. When BPI measures 20% or below, markets are considered oversold and sentiment is bearish.
Figure 1 - Bullish Percent Index. Source: Tradingview
Long Short Ratio
The long-short ratio compares the amount of an asset that is available to be sold short with the amount that has actually been shorted. This information can be used as a market sentiment indicator. A large percentage of traders and investors shorting the market points towards a bearish sentiment within the market and can be used to measure the amount of interest there is in shorting an asset. Essentially, it means: The more short positions there are in relation to the available supply, the greater the bearish sentiment might be.
Figure 2: BTC Long/Short Ratio. Source: Coinglass
Moving averages (MA)
Moving averages (MA) and simple moving averages (SMA) are indicators that are popular among those who analyse market movements while determining their underlying sentiment. While moving averages can be used in many different ways, a well-known concept known as a "Golden cross" or "Death cross" can reveal market bias.
Whenever the 50-day SMA crosses above the 200-day SMA, it is widely considered that momentum for an asset has shifted to the upside, revealing underlying bullish sentiment. This is also known as a "golden cross." Whenever the opposite happens and the 50-day SMA crosses below the 200-day SMA, momentum has shifted to the downside, suggesting bearish sentiment. This phenomenon is known as a death cross.
Figure 3: Moving averages crossing. Source: Tradingview
Disclaimer: The opinions expressed in this article are for informational purposes only. This article does not constitute an endorsement of any of the products and services discussed or investment, financial, or trading advice. Qualified professionals should be consulted prior to making financial decisions.
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