This week NAAIM Sentlment dropped below zero, something that hasn’t happened since October 2008. While bearish extremes in sentiment can identify important price lows, the instance of the October 2008 negative sentiment reading did not, so I think it would be premature to anticipate an important price low based upon the current negative sentiment reading.

I was also looking for a price pattern similar to what we have had in the last few months — a rounded consolidation ending in a breakdown and key reversal pattern. It is a bar that breaks down from the consolidtaion, but then reverses up and closes back inside the consolidation. Just like this week so far. I found a very similar pattern in the third quarter of 2008 (marked by the arrow). As you can see by the price decline that followed, it was not a key reversal after all.

Bottom Line: We are in a bear market, and bearish sentiment indicators are not automatically indications that a major price low has been made. In fact, extreme sentiment readings can appear months ahead of an actual price top or bottom.

As for the similar key reversal patterns, the purpose is to illustrate how tricky bear markets can be, but we can’t assume that the current pattern will resolve the same way as the one in 2008. Nevertheless, current price action is occuring within a context similar to that of 2008, so bullish assumptions would be premature.

Images: Flickr (licence attribution)