Economic data can also be a good indicator (contrarian or otherwise) of a top or bottom in the stock market. Remember, the crowd is typically wrong; high levels of pessimism or optimism generally indicate that the market is headed for a reversal to the other direction. When looking at sentiment data alongside prices, it's crucial to look at enough data to get a glimpse of where sentiment has historically stood through several previous market cycles. Otherwise, you may not have a full picture of which sentiment numbers are significant.
Increasing Profitability on Reversal Bets
Because spotting reversals isn't foolproof, it's important to use smart risk-management techniques to avoid getting hammered if a potential reversal fails. The easiest way to do this is with well-placed stop losses (hard or otherwise) just outside the stock's trend line.
In especially volatile markets, reducing your position sizing is another excellent way to reduce your risk exposure and limit the amount of drawdown you see while you're looking for trend reversals.Don't ever try to "top tick" a reversal by betting against stocks while they're still in uptrend mode. A breakdown in price should always be your trade signal. Instead, wait for the reversal to actually occur, then capture the meat of the move. While being reactionary will cost you a few points on either side of the trade, it'll dramatically increase your success rate. While spotting reversals early can significantly improve your ability to profit in both bull and bear markets, it's likely one of the most difficult (and sought-after) skills to master in technical analysis. As with most disciplines, practice is key. Must Read: Warren Buffett's Top 10 Dividend Stocks