Section 8 - Chapter 1 - Market Sentiment & Technical Analysis
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Section 8 - Chapter 1 - Market Sentiment & Technical Analysis
- 1. Chapter 1 - Market Sentiment and Technical Analysis Section 8 – Sentiment Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia
- 2. Agenda Market Sentiment and Technical Analysis Sentiment Drives Market Prices The Crowd Determines Sentiment This Content is Copyright Reserved Rights Copyright 2025@PTAIndia
- 3. Sentiment in Financial Markets Definition of Sentiment in Financial Markets Financial market sentiment refers to the overall attitude or mood of investors toward a particular market, asset, or economy. It reflects collective emotions—whether investors are optimistic (bullish) or pessimistic (bearish)—and influences buying and selling behaviors. Indicator Interpretation Bullish Signal Bearish Signal VIX (Volatility Index) Measures market fear & uncertainty Low VIX (calm market) High VIX (fear rising) Put/Call Ratio Compares bearish vs. bullish option bets Low ratio (more calls, optimism) High ratio (more puts, fear) Market Breadth Measures how many stocks participate in a trend More advancing stocks More declining stocks Investor Surveys (AAII, etc.) Polls on investor sentiment More bullish respondents More bearish respondents CNN Fear & Greed Index Aggregates multiple sentiment factors High value (greed) Low value (fear) Fund Flows Tracks money moving into or out of asset classes Inflows into stocks Outflows into stocks News & Social Media Sentiment Uses AI to analyze headlines & posts Positive sentiment in media Negative sentiment in media
- 4. Sentiment in Financial Markets Sentiment vs. Fundamentals vs. Technical Analysis Key Difference: Sentiment is psychological and often drives short-term moves, while fundamentals and technical help determine long-term trends. Factor Definition Examples Sentiment Investor mood/emotion Surveys, news, option activity Fundamentals Economic & financial health Earnings, GDP, interest rates Technical Analysis Price & volume trends Moving averages, RSI, chart patterns
- 5. Sentiment in Financial Markets Interpreting Sentiment in Markets 1. Extreme Fear → Possible Buy Signal (Contrarian investors may see opportunity) 2. Extreme Greed → Possible Sell Signal (Markets may be overbought) 3. Neutral Sentiment → No clear signal, look at fundamentals & technicals 4. Divergence Between Sentiment & Price → Potential Turning Point o If sentiment is bullish but prices drop, sentiment may be wrong. o If sentiment is bearish but prices rise, a reversal may occur. Conclusion: Market sentiment is a crucial factor in short-term market movements but should be combined with fundamentals and technical analysis for a well- rounded investment approach.
- 6. Sentiment in Financial Markets Sentiment Drives Market Prices – Key Insights Market sentiment is a powerful force that can drive asset prices higher or lower, often independently of fundamental valuation. It reflects investor psychology and can create trends, bubbles, and crashes. How Sentiment Drives Market Prices Factor Impact on Prices Example Bullish Sentiment Increases demand → Prices rise Tesla’s 2020-2021 rally fueled by optimism Bearish Sentiment Increases selling → Prices fall 2008 Financial Crisis panic selling Herd Mentality Investors follow the crowd Meme stock rallies (GME, AMC) Fear & Greed Fear → Sell-off, Greed → Buying frenzy Bitcoin crashes & booms News & Social Media Positive/negative headlines shape sentiment Elon Musk’s tweets moving crypto markets
- 7. Sentiment in Financial Markets Sentiment vs. Fundamentals: What’s More Powerful? 💡 Key Takeaway: Sentiment can override fundamentals in the short run, but fundamentals win over time. Factor Short-Term Impact Long-Term Impact Sentiment Drives quick price swings Fades if not backed by fundamentals Fundamentals May be ignored short-term Dictates long-term value Sentiment Indicators & Market Movements • Fear Index (VIX): High = Fear (stocks fall), Low = Confidence (stocks rise) • Put/Call Ratio: High = Bearish, Low = Bullish • Media Sentiment: Positive = Market optimism, Negative = Sell-offs • Fund Flows: Inflows = Bullish, Outflows = Bearish 🚨 Contrarian Signal: When sentiment reaches extreme greed or fear, markets often reverse!
- 8. Sentiment in Financial Markets Key Takeaways from Sentiment-Driven Bubbles & Crashes ✅ Greed drives bubbles → Investors ignore risk, overhype assets. ✅ Fear drives crashes → Panic selling leads to massive losses. ✅ Contrarian Investors Win → Smart investors buy during fear and sell during euphoria. ✅ Fundamentals Always Matter → Hype alone can’t sustain high valuations forever. 📊 Final Thought: Sentiment is powerful, but combining it with fundamental analysis is the best strategy for long-term success.
- 9. Market Bubbles & Crashes Driven by Sentiment Market sentiment has fueled some of the biggest financial booms and busts in history. Here are some key examples where investor emotions, rather than fundamentals, drove market prices to extremes. 1. Dot-Com Bubble (Late 1990s – 2000) What Happened? • Investor euphoria over internet stocks led to massive speculation. • Companies with no profits (or even revenue) saw valuations skyrocket. • “New Economy” mindset: Investors believed traditional valuation metrics no longer applied. The Crash (2000-2002) • Reality set in: Many companies had no real business model. • Sentiment flipped—fear replaced greed. • NASDAQ fell nearly 80% from its peak. 💡 Lesson: Hype can drive prices up, but fundamentals ultimately matter.
- 10. Market Bubbles & Crashes Driven by Sentiment 2. 2008 Financial Crisis & Housing Bubble What Happened? • Irrational exuberance in real estate: “Housing prices never go down.” • Lenders gave out risky mortgages (subprime loans) to unqualified buyers. • Banks packaged these bad loans into securities and sold them as safe investments. The Crash (2007-2009) • Housing prices collapsed → Banks failed → Market panic. • Extreme fear led to a global sell-off. • The S&P 500 lost over 50% of its value. 💡 Lesson: Overconfidence in an asset class can lead to massive crashes.
- 11. Market Bubbles & Crashes Driven by Sentiment 3. Bitcoin & Crypto Boom/Bust Cycles 📈 Crypto Bull Runs (2017, 2021) • Retail euphoria: FOMO (Fear of Missing Out) drove Bitcoin to $20,000 in 2017 and $69,000 in 2021. • Meme coins (Doge, Shiba Inu) surged purely on hype and social media trends. • Institutional adoption & celebrity endorsements added fuel. 📉 Crypto Crashes (2018, 2022) • Sentiment collapsed after regulatory crackdowns and scams (FTX, Terra Luna). • Bitcoin fell over 80% in 2018 and nearly 75% in 2022. • Investors panicked, leading to mass sell-offs. 💡 Lesson: Crypto markets are highly sentiment-driven, with extreme volatility.
- 12. Market Bubbles & Crashes Driven by Sentiment 4. Meme Stock Mania (2021 – GameStop & AMC) 📈 The Rise • Retail traders on Reddit (WallStreetBets) coordinated short squeezes. • GameStop (GME) went from $20 to $483 in days! • Social media fueled irrational buying, not fundamentals. 📉 The Fall • Brokers (Robinhood) restricted trading, crushing sentiment. • Stocks crashed as buying pressure faded. • Many late investors lost huge sums. 💡 Lesson: Social sentiment can create short-term spikes, but fundamentals will always catch up.
- 13. The Crowd Determines Sentiment The Crowd Determines Sentiment – How Collective Psychology Moves Markets Market sentiment isn’t formed by a single investor—it’s driven by the collective psychology of the crowd. When enough people share the same emotions and behaviors, they create trends, bubbles, and crashes. How the Crowd Shapes Market Sentiment Factor Impact on Sentiment Example Herd Mentality Investors follow the majority, even irrationally 2021 Meme Stock Rally (GME, AMC) Social Media & News Amplifies emotions, spreads FOMO & panic Elon Musk’s tweets moving crypto prices Fear & Greed Extreme emotions lead to overbuying or panic selling 2008 crash (fear) vs. Dot-Com bubble (greed) Retail vs. Institutional Sentiment Retail traders can hype stocks, while institutions react with caution Reddit traders vs. Hedge Funds in GameStop saga
- 14. The Crowd Determines Sentiment The Crowd Determines Sentiment – How Collective Psychology Moves Markets Market sentiment isn’t formed by a single investor—it’s driven by the collective psychology of the crowd. When enough people share the same emotions and behaviors, they create trends, bubbles, and crashes. How the Crowd Shapes Market Sentiment 💡 Key Takeaway: The crowd’s mood swings between euphoria and despair, causing volatile market movements. Factor Impact on Sentiment Example Herd Mentality Investors follow the majority, even irrationally 2021 Meme Stock Rally (GME, AMC) Social Media & News Amplifies emotions, spreads FOMO & panic Elon Musk’s tweets moving crypto prices Fear & Greed Extreme emotions lead to overbuying or panic selling 2008 crash (fear) vs. Dot-Com bubble (greed) Retail vs. Institutional Sentiment Retail traders can hype stocks, while institutions react with caution Reddit traders vs. Hedge Funds in GameStop saga
- 15. The Crowd Determines Sentiment Examples of Crowd-Driven Market Moves 1. Tulip Mania (1600s) – First Bubble 📈 The Rise: Tulips became a status symbol, demand soared, and prices skyrocketed. 📉 The Crash: Reality hit—people realized tulips weren’t worth fortunes, panic selling ensued. Lesson: The crowd can create irrational exuberance, but fundamentals always win. 2. Great Depression (1929) – Mass Panic Selling 📉 Fear Took Over: After the stock market crash, mass hysteria led to bank runs and economic collapse. Lesson: The crowd’s fear can cause self-fulfilling downturns. 3. Bitcoin & Crypto Booms (2017, 2021) & Crashes 🚀 FOMO (Fear of Missing Out): The crowd rushed in, pushing Bitcoin to $69K in 2021. 😱 Panic Selling: The crowd exited fast in 2022, leading to a crash. Lesson: The crowd fuels extreme cycles of boom and bust.
- 16. The Crowd Determines Sentiment Contrarian Investing – Betting Against the Crowd 🔍 Example: Warren Buffett’s famous advice—"Be fearful when others are greedy, and greedy when others are fearful.“ Final Thought: The Crowd Moves First, Smart Money Follows • The masses create trends, but they often overreact. • Smart investors watch sentiment to time entries/exits. • Extreme sentiment signals reversals—greed leads to bubbles, fear leads to bargains. Crowd Sentiment Contrarian Move Extreme Greed (Bubble) Sell or short the asset Extreme Fear (Panic Selling) Buy undervalued assets
- 17. Sentiment Analysis Tools Sentiment Analysis Tools – Tracking the Crowd’s Emotions in Markets To stay ahead of market moves, traders and investors use sentiment analysis tools to gauge the crowd’s mood. These tools help predict potential turning points, identify overbought/oversold conditions, and manage risk. 1. Sentiment Indicators & Tools Tool/Indicator What It Measures Bullish Signal Bearish Signal CNN Fear & Greed Index Aggregates 7 market factors (volatility, momentum, put/call ratio, etc.) High (Extreme Greed) Low (Extreme Fear) CBOE Volatility Index (VIX) Market fear (higher = more uncertainty) Low (confidence) High (panic) AAII Investor Sentiment Survey Retail investor optimism vs. pessimism More bulls than bears More bears than bulls Put/Call Ratio Option traders’ risk appetite Low (calls > puts) High (puts > calls) Commitment of Traders (COT) Report Institutional vs. retail positions in futures markets Big money buying Big money selling Social Media Sentiment (Twitter, Reddit, Google Trends) Retail trader hype (crypto, meme stocks, etc.) High positive mentions High negative mentions
- 18. Sentiment Analysis Tools 2. AI & Data-Driven Sentiment Analysis Tools For deeper insights, traders use AI-powered tools that analyze news, social media, and financial reports: 💡 Key Takeaway: Social sentiment data can be a leading indicator, but it must be used with caution— hype can fade fast. Platform Features Best For StockTwits Tracks stock sentiment based on social media Retail trader discussions Alternative.me Crypto Fear & Greed Index Measures crypto market sentiment Bitcoin & Altcoins MarketPsych AI-driven sentiment analysis for stocks & commodities Institutional investors SentimenTrader Quant-based sentiment models Swing & position traders Twitter & Reddit Trends (Hootsuite, BuzzSumo) Tracks social media buzz on stocks & crypto Meme stocks & viral assets
- 19. Sentiment Analysis Tools 3. How to Use Sentiment in Trading & Investing ✅ Extreme Greed → Potential Market Top (Time to take profits or hedge) ✅ Extreme Fear → Possible Buy Opportunity (Look for value plays) ✅ Divergence → Caution Signal (If sentiment is bullish but price is falling, something is wrong) 📊 Example Strategy: • Contrarian Approach: Buy when the Fear & Greed Index is in “Extreme Fear” mode, sell when it's in “Extreme Greed.” • Confirm with Fundamentals: If sentiment is bullish but earnings are weak, a bubble may be forming. Final Thought: Sentiment Is a Tool, Not a Crystal Ball Sentiment analysis helps traders anticipate short-term price swings, but it should be combined with technical and fundamental analysis for better decision-making.
- 20. Next Chapter 2 - Sentiment Measured from Market Data Section 8 – Sentiment Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia