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How Daily Small Trader Market Sentiment Forecasts & Times
Short Term Market Moves

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Overview


Market sentiment and contrary opinion as measured by various indicators have been used by traders for many years. The theory of contrary opinion asserts that if a majority of traders agrees on the direction of a market move, then the odds are significant that prices will, in fact, move in the opposite direction. Various measures of market sentiment have been used over the years in attempts to apply contrary opinion effectively in the markets. Among these are odd lot short sales, options volatility, broker opinion surveys, and trader opinion surveys. The good news is that the theory of contrary opinion is correct; the bad news is that the traditional measures of contrary opinion either tend to be LATE or generally unreliable.

The DAILY SENTIMENT INDEX (DSI) was initiated in 1987 to gather the opinions of traders on all active US futures markets and in the mid 1990's for the Euro zone interest rate and equity futures markets. The primary difference between all other market sentiment indicators and the DSI is that the DSI is available within one hour and that the DSI gathers the opinion of the small retail trader who is most likely to be WRONG at market turning points.

By examining small trader sentiment we can arrive at a very valid measure of contrary opinion that has had an uncanny record of accuracy for many years. Yet, we also know that in spite of the fact that small traders are usually the most bullish at the top and the most bearish at the bottom, the real issue is HOW TO TIME market entry using the DSI. As always, timing is the ultimate issue. This report will give youan overview of DSI and timing with DSI. In the charts below DSI is shown as percentage of traders bullish. Here is what the daily DSI report looks like. the cells show the % of small traders bullish on the market. The four (4) columns show raw DSI and 3, 5, 9, and 18 day moving averages of the raw DSI. The sample shown below illustrates a typical daily report.

SAMPLE Network Press Inc., Daily Sentiment Index
  Date, Raw % bullish, 3, 5, 9, and 18 day Moving Averages
DSI 08-19 08-16 08-15 08-14 08-13
  Raw 3ma 5ma 9ma 18
ma		 Raw 3ma 5ma 9ma 18
ma		 Raw 3ma 5ma 9ma 18
ma		 Raw 3ma 5ma 9ma 18
ma		 Raw 3ma 5ma 9ma 18
ma
Market %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up %Up
                                                   
T-Bonds 53 56 70 77 75 45 68 77 80 77 71 84 86 84 79 87 90 87 86 80 93 91 87 85 80
T-Notes 61 64 73 79 77 59 71 79 82 78 73 82 85 85 80 81 88 87 87 81 93 90 88 86 81
Euro Dollar 65 70 76 79 76 65 76 79 81 77 79 83 83 83 78 83 84 83 84 78 87 84 84 83 78
S&P Index 71 70 64 59 48 68 69 62 55 45 71 61 60 49 42 68 57 58 43 38 44 54 51 40 35
Nasdaq Index 71 69 61 53 44 69 67 55 48 41 68 55 51 42 38 65 47 47 37 34 32 40 41 32 31
Swiss Franc 36 49 52 49 47 55 55 56 48 49 56 56 54 49 48 55 56 50 49 50 58 53 48 49 52
Euro FX 31 48 52 51 48 56 56 58 51 50 58 58 56 51 49 55 59 52 51 50 62 56 51 51 52
Japanese Yen 59 68 70 61 48 71 75 72 56 49 75 74 67 52 48 79 71 59 48 48 68 61 52 43 49
British Pound 23 37 39 33 40 46 44 41 34 43 42 41 36 33 44 44 39 32 34 46 38 31 29 32 49
Canadian Dollar 33 54 58 52 46 65 64 60 52 47 64 65 56 47 44 63 57 51 44 42 67 50 48 40 41
Dollar Index 55 37 34 40 46 28 27 30 40 43 28 29 34 44 45 25 31 40 44 44 33 39 44 47 43
Crude Light 89 86 82 65 64 83 82 79 62 63 85 79 70 59 61 77 76 59 57 60 75 62 50 55 60
Heating Oil 80 82 77 62 62 84 80 75 61 61 82 74 66 56 59 74 70 56 54 58 66 57 48 52 57
Unleaded Gas 75 75 73 65 62 73 74 71 63 62 77 72 67 60 60 72 68 62 58 60 66 61 58 55 60
Natural Gas 77 74 70 58 55 75 70 68 53 55 71 66 61 48 52 65 65 55 45 51 63 56 47 43 50
Gold 16 23 28 44 34 25 26 35 46 34 28 32 44 49 33 24 41 51 51 36 45 56 61 51 39
Silver 15 20 22 32 24 23 21 26 33 24 22 24 31 34 23 19 28 36 34 26 30 39 41 34 28
Platinum 66 72 73 68 52 74 75 73 64 49 77 74 71 59 46 75 71 68 54 43 71 68 64 49 40
Copper 43 43 34 27 25 41 35 29 24 23 45 28 25 22 21 19 20 20 19 20 20 21 19 21 20
Corn 75 81 85 80 73 81 86 88 80 73 86 90 86 80 72 92 91 82 79 72 92 84 78 76 71
Wheat 77 75 81 82 74 73 78 83 82 73 75 84 84 83 73 86 88 85 83 73 92 87 85 81 73
Oats 75 77 80 75 70 75 80 80 75 69 80 83 79 74 69 84 82 76 73 69 85 76 73 71 69
Soybean 61 72 78 74 67 73 80 82 75 68 82 85 80 75 67 85 86 76 74 68 87 78 73 73 67
Soybean Oil 65 76 79 75 71 77 82 83 75 71 85 85 80 74 70 85 85 77 73 70 85 77 73 72 70
Soybean Meal 60 74 79 78 70 77 83 83 79 70 85 86 83 79 69 88 85 81 78 69 85 81 78 77 69
Orange Juice 66 70 70 71 70 70 71 72 71 71 73 71 73 71 71 70 72 74 70 72 69 74 72 70 73
Coffee 12 14 17 18 17 15 18 19 18 18 15 20 20 19 18 24 22 21 19 17 20 20 19 18 17
Cocoa 73 71 68 62 62 69 69 64 60 61 72 66 62 57 60 65 60 58 53 61 62 57 57 53 62
Sugar 45 57 59 60 57 60 63 61 61 58 67 63 61 60 59 63 59 61 59 59 60 59 61 58 60
Lumber 22 21 20 19 22 19 19 19 19 22 21 20 19 19 22 18 18 19 21 21 22 19 18 23 21
Cotton 65 63 63 55 58 60 63 64 52 58 63 64 59 49 58 66 65 54 50 59 63 55 48 50 60
Live Cattle 61 62 65 68 69 62 64 66 69 68 64 67 70 69 68 66 68 71 70 69 70 73 72 70 69
Live Hogs 18 17 17 24 34 15 17 17 25 36 18 18 24 27 37 18 18 27 29 39 17 27 29 30 41
Pork Bellies 19 22 24 27 20 23 26 23 28 21 25 26 25 27 21 29 23 28 25 21 23 24 29 22 25
CRB Index 72 77 78 71 65 77 80 79 69 64 82 80 76 67 63 80 79 71 65 64 79 73 66 63 64
Nikkei Index 29 30 28 28 23 28 30 27 27 23 33 28 28 26 22 28 24 27 24 22 24 26 27 22 21
* = Market Closed


Daily Sentiment Index at Extremes: Typical Behavior


In gathering over 18 years of daily sentiment a number of clear patterns have emerged.

They are as follows:
• When the DSI rises to the 85% area or higher the odds of a top are significant
• When the DSI falls to the 15% area or lower, the odds of a bottom are significant
• The longer the DSI remains at a high level, the larger and longer the coming decline is likely to be
• The longer the DSI remains at a low level, the larger and longer the coming rally is likely to be
• The small trader is NOT always wrong at turning points they are USUALLY wrong at EXTREMES
• The DSI can be used as a timing indicator on its own
• The DSI can be used as a timing indicator when combined with other indicators and as part of an overall trading model.


HERE ARE SOME CHARTS ILLUSTRATING THE DSI AT MARKET EXTREMES:




This chart shows the DSI plotted against the Euro. I have marked areas where the DSI was at an extreme high or low. Note the close correlation between DSI tops and bottoms and price tops and bottoms. Note also that DSI is a LEADING indicator - it tends to precede price tops and bottoms. Furthermore, DSI can be combined with traditional indicators as a confirming tool.




This chart shows Natural Gas futures plotted against daily DSI. As you can see, the highs and lows in DSI at EXTREMES correlate closely with tops and bottoms in price. Here also note that the DSI tends to precede tops and bottoms and it is, therefore, an effective leading indicator.




This chart shows an entirely different application if DSI. I've run a moving average of the DSI (red line) with a moving average of the moving average (blue line). Short term buy and sell signals are indicated when the lines cross. By adding trailing stops and effective risk management, the DSI can be used more systematically as its own confirming indicator.




This chart shows the EuroStoxx 50 vs two moving averages of DSI. Signals occur at the moving average crossovers.


Timing Indicators and DSI


In addition to the applications above, DSI can be used in conjunction with technical indicators such as momentum, stochastic's, ADX, RSI and moving averages either as a confirming indicator, but more often as a leading indicator of possible trend changes.

Who Uses the DSI?


The DSI and DSI Europe are used by some of the most well know institutional investors, money managers, banks and brokerage firms as well as individual traders the world over. Subscribers to the DSI service read like a "who's who" of major players in the markets.

Suggested Applications of DSI


Within the context of a trading model that includes a SETUP, TRIGGER and FOLLOW THROUGH procedure the DSI is a SETUP. In our experience its best application is as part of an overall timing approach that includes other indicators as well as a trigger for position entry. DSI can remain at a high or low level for many days and in this way it is similar to various other "overbought" or "oversold" indicators. DSI clients have developed a variety of proprietary applications for DSI.

Summary


The Daily Sentiment Index has shown itself to be a valid indicator of short term market swings. Since DSI is not derived from price it is distinctly different than the vast majority of indicators currently being used by traders. DSI provides an "emotional" indicator of market behavior which, given that it is not directly related to price, places it in a unique position in the broad spectrum market related data. There are numerous other uses above and beyond those described in this brief report. DSI clients currently include some of the top money managers, traders, financial institutions and speculators throughout the world. DSI data is available within one hour of market closings. It is supplied as a report, data file or recorded message. It can be delivered by FAX, data download (FTP) and/or Internet. The entire historical data base (from 1987 to present in US markets) is available for research purposes and accompanies all subscriptions.