Time Frame: Short-Term | Update Schedule: Daily | Source: SentimenTrader
Construction:
The short-term Optimism Index (Optix) for stocks is constructed by observing the extremes currently registered by a series of short-term indicators that have had the greatest success in highlighting extremes in price.
Each indicator is graded on a scale that is limited on both the downside and upside, so that a historic extreme in any one indicator cannot "overpower" the overall score. Each indicator is limited in its influence, so that an extreme in the model is a true reflection of a broad confluence of extremes among various indicators.
Components include indicators like the price oscillators, cumulative tick, put/call ratios, etc.
When the Optix exceeds 60%, it suggests a broad number of indicators have reached excessive optimism levels. Anything beyond 70% is truly extreme. This is a contrary guide, so such extremes would suggest price weakness going forward.
If the Optix drops below 40%, then a number of indicators are showing excessive pessimism. Anything below 30% would be truly extreme and suggest a market bounce is likely over the next 3-5 days.
As with most of our indicators, signals work best when going counter to the trend. For example, buying when the Optix drops below 30% when stocks are in a general uptrend is more likely to work out than when stocks are in a downtrend (say, below the 200-day moving average).
Also, failures contain good information. If stocks cannot rally after the Optix drops below 40% or, even more meaningfully, below 30%, then there is heavy supply and stocks will likely continue their downtrend in the weeks ahead.
