Record AAII bearishness (in it's 25 year historical record) cannot and should not be ignored, imho. BUT....I've always maintained that sentiment alone cannot be used as a timing signal, per se, because it only measures potential for the next move, which is very important to monitor and know, but it still doesn't tell you WHEN the move will occur. IOW, while it's true that over the years, important bottoms have coincided with peak bearishness, the fact remains that in real time, we cannot know what the peak bearishness reading will be. 70% is a RECORD. That's highly significant. But will it peak here? Or at 75%? or 80%? Or 90%? We can't know.
Same with momentum divergences. I've just reviewed dozens (perhaps hundreds) of internal momentum measures, and I couldn't find a single one which has NOT held above the OCT/NOV 2008 lows (though I'm sure someone will point one or two out to me ), as all of the major averages have now moved into new low ground. Many here will argue that this means nothing, just as many will maintain that record bearish sentiment readings mean nothing. I maintain that they tell us something very important: they tell us that the potential for a very meaningful IT rally is at hand. Again, a look back at market history shows important moves spring from big divergences- this market principal has been true for a hundred years and then some, and will be 100 years hence.
But here's the catch. Just like with sentiment, the divergences alone don't tell us when the move will begin. Will it start from here? Or 5% down? or 25% down? or more? We can't know.
So are record AAII bearishness and massive divergent readings in internal market momentum of no value to a trader? Far from it! They tell him two things...the potential size and duration of a subsequent move, and that the time has come to be alert to a trend change.
Now for the last piece of the puzzle....when? IMHO, we will know when the IT advance has begun when momentum itself turns up. Price follows momentum. I use SS's for that purpose. Other traders use different measures. Still others use pure price trends, and of course, that's a completely valid approach as well, as proven by sucessful traders here.
For now the trend is down, and that means shorting rallies is the profitable play for aggressive traders. Until the trend chnges that remains true. In fact, often the very best part of a trend occurs in just the last couple of days of that trend before it changes- implying that possibly the biggest trading profits from the short side still lie ahead.
But I just wanted to express my view, fwiw, about this age old argument, about the value of these technical tools-sentiment and divergences, and my view, again, fwiw, on how they should be viewed.
Good trading, D
Edited by IYB, 07 March 2009 - 05:40 PM.