How to Improve Your Analysis of Market Sentiment

Fundamentals move markets; technicals record history and illuminate patterns. Great traders incorporate both schools to improve analysis of market sentiment. Professional traders refer to the economic calendar for events/reports that have the potential to alter a trend or start a new one. Recognizing the immediate reaction following an unexpected event is essential to understanding the relationships between 5 major sectors: equity, interest rate, precious metal, energy and foreign exchange. Most stock and ETF movement is tied to economic conditions as well as guidance and earnings estimates.

Sentiment Drives Movement

Ordinarily, a treasury market bull might hedge a long position by buying 10-year note puts, selling calls or going short the ETF TLT, just before employment or inflation report. Price stability and full employment promotion are the Federal Reserve mandates. Thus, the Fed frequently sways stock and bond prices. For example, Fed Chair Powell’s somewhat hawkish comments a week ago incited a sharp sell-off in equities. Many stock market traders use options for protection prior to earnings reports. Farmers frequently utilize grain futures and ETFs as insurance before supply and demand data are released (WASDE). These are examples of regularly scheduled events.

Economists and their teams work diligently gathering statistics to calculate consensus estimates for each piece of essential news. Research reveals estimates, which reveal benchmarks. If a report is near expectations, the impact on price will be minimal. An above average move occurs when the actual report is far from expectations. Thus, it is imperative to realize when an upcoming event will part of the equation. Great traders are aware of the road ahead. A good technical read pales to a better understanding of the fundamental situation.

Kneejerk Reactions Define Support/Resistance Areas

If a report is near expectations, the news should have little or no impact on prices. However, an unexpected report frequently incites panic. This phenomenon occurred after the last FOMC meeting and Fed Chair Powell’s press conference. It is a good practice to mark on your charts where the market was just before an abrupt move caused by an event. When such areas are retested markets typically pause and frequently reverse. The chart below Illustrates this point. The S&P shot higher immediately after the June employment report. When the market revisited this launch point about two weeks later, buyers emerged making prices jump.

S&P Futures chart

Referring to previous critical moments and prices will improve your analysis of market sentiment as well as enhance your ability to pick support and resistance zones. Another way to hone your skills as a market timer is to pay close attention to related markets following an unexpected event. For example, a drop in interest rates may impact the dollar, which may affect equity indexes, energy and even precious metals. By tracking these relationships, you will find that they often make tops and bottoms in unison. A sharp move in one sector may cause a chain reaction in other sectors.

John Seguin
Senior Technical Analyst
Market Taker Mentoring, Inc.