Technical Analysis of the Financial Markets (New York Institute of Finance) by John J. Murphy

Author:John J. Murphy [Murphy, John J.]
Language: eng
Format: azw3, mobi
Publisher: Penguin Publishing Group
Published: 1998-12-31T16:00:00+00:00

Interpreting Bullish Consensus Numbers

Most traders seem to employ a fairly simple method of analyzing these weekly numbers. If the numbers are above 75%, the market is considered to be overbought and means that a top may be near. A reading below 25% is interpreted to warn of an oversold condition and the increased likelihood that a market bottom is near.

Contrary Opinion Measures Remaining Buying or Selling Power

Consider the case of an individual speculator. Assume that speculator reads his or her favorite newsletter and becomes convinced that a market is about to move substantially higher. The more bullish the forecast, the more aggressively that trader will approach the market. Once that individual speculator’s funds are fully committed to that particular market, however, he or she is overbought—meaning there are no more funds to commit to the market.

Expanding this situation to include all market participants, if 80-90% of market traders are bullish on a market, it is assumed that they have already taken their market positions. Who is left to buy and push the market higher? This then is one of the keys to understanding Contrary Opinion. If the overwhelming sentiment of market traders is on one side of the market, there simply isn’t enough buying or selling pressure left to continue the present trend.

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