Extreme sentiment is not automatically a reversal signal.
| Concept | Explanation | |---|---| | Contrarian interpretation | Extreme one-sided sentiment may indicate that most willing buyers or sellers are already positioned. | | Trend-following interpretation | Strong sentiment may confirm a durable trend and continue for a long period. | | Crowding | Many participants hold similar positions, increasing vulnerability to forced exits. | | Catalyst | New information capable of changing the prevailing expectation. | | Confirmation | Price, breadth, flows, or fundamentals support the sentiment view. |
Key idea: Extreme sentiment is not automatically a reversal signal. It becomes more useful when combined with evidence that price or participation is changing.