Is this how euphoria looks like? A reliable pattern in Bonds and AUD

Is this how euphoria looks like? A reliable pattern in Bonds and AUD

US STOCK MARKET

I want to begin this post with an observation I've had in the past week, that I want to share with you. It is about sentiment. 

It is no secret, and if you are reading any trading sites you'll be aware how bullish the sentiment currently is. All kind of indicators out there are pointing out that what we see right now is excessive speculation. But one is to look at some indicator showing an extreme, another thing is to see that extreme with your own eyes.

The past week I saw too many cases where people were buying stocks with 

  • no P/E
  • Forward P/E above 200
  • P/S at almost 50

What is even more disturbing is that the reason for those trades was breaking some short-term trend line?!? I know we are in a bull market, support by the central banks, governments and who knows what else. I am also an optimist for the stock market and in general, I have always preferred to buy rather than sell short. But to buy a company with such a fundamental picture shown by those ratios is madness.

After I saw people just screening the market and buying every company that has a broken trend line without checking anything else, I decided to continue investigating further. I wondered if what I saw was just a separate case. Here is what I found:

Russell 2000 showing euphoria

This is the monthly chart of the E-mini Russell 2000 index, the index of the small companies. In grey, you can see the bear market in 2007-2009 and the one we've witnessed last year. From what I see, small companies are getting a lot of attention. Usually, if you check a stock market chart the declines are those that happen fast. But it seems that this time the fastest movement, visible on the screen, is the last up move.

Is this how euphoria looks like?

Sure looks like it. The sentiment is a useful tool, but often it signals too early, and it is impossible to tell how long such a state would last. That is even more applicable if we are talking about a possible market top. To start working on such a scenario we need to see other things supporting the sentiment. 

In any case, avoid the hype, you won't miss anything. Pick precisely your positions.

30 YR T-Bonds and AUSTRALIAN DOLLAR

This week I would like to show you a setup that is a combination of price action and an accumulation/distribution indicator.

The next two images are showing the daily chart of Australian Dollar and US T-Bonds futures.

Australian Dollar Distribution pattern

US T-Bonds Accumulation pattern

In both cases, we have a sideways movement with price action not giving us much while at the same time the On Balance Volume (green line) is showing the direction.

This is a very reliable setup especially if a false breakout occurs. Here we can combine one particular shape we saw in the last week's blog post. I am talking about the 00 shape with this setup. If such a candlestick (bar) shape appears in a direction opposite to the direction currently suggested by the OBV (up for bonds and down for AUD) creating a false breakout of the range, that would be a great signal.

Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading


Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, ireallytrade.com. Charts made with TradeStation®. tradestation.com

TAGS: S&P500, SPY, SPX, Federal Reserve, COT, Commitments of Traders, Down Jones, Cycles, Fundamental Analysis, Price Action Trading, Australian Dollar, Bonds, Russell 2000

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