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This is what we believe to be the most
comprehensive model of current sentiment conditions currently published.
That does not mean that it necessarily uses the most indicators
our research, we have found that many popular sentiment indicators have
predictive ability a little better than random, which is not acceptable to
We want proof that an indicator is useful before using it in a
model. Through exhaustive research, we have determined the sentiment
indicators (both published and proprietary) that are most correlated with
market direction, and we weight those indicators according to their
correlation. Some of the measures used in the model include:
Proprietary versions of the Commitments
of Traders data
Put/call and open interest put/call
Several un-published indicators
This is not an exhaustive list, but you
get the idea. We have tried to use a combination of measures that
would give a broad picture of current conditions, but yet be responsive
enough to reflect daily conditions.
The chart shows the 5-, 10- and 21-day moving
averages of the model in blue, with the green and red lines
depicting +2 and -2 standard deviations from the 12-month mean,
respectively. This means that the model should stay within these
boundaries 95% of the time, and when it doesn't, that tells us something
When the model ventures outside of its
lower (green) trading band, then it suggest that pessimism is excessive
and we want to look for rising market prices going forward.
When it exceeds its upper (red) band,
then sentiment has gotten too optimistic and the broader market
typically has trouble holding further gains going forward.
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