Calm Before the Sentiment Storm?

(Update Thursday January 28th 4:15PM EST)
Looks like a mixed bag after hours slightly skewed lower due to FANG stocks taking a hit. AMZN extremely bad. MSFT good. V pretty good earnings but missed revenues. EA bad. Anyway, I noticed Jan 29 weekly OPEX was pegged at SPX 1900-1910 and we are within the typical +/- 1% of max pain although it works better for the monthlies. Assuming we reset the Crash Setup Step 5 to the stretched 5-day rally high at SPX 1917 on Wednesday, none of the crashes I studied stayed up thru Day 3, so the crash setup is on thin ice probably drowning in the cold water if Fri/Mon don't drop hard. Good fortune.
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If you look at the Sentiment Trader dashboard, you will see that 11% of 30 technical indicators are at an optimistic extreme while 34% are at a pessimistic extreme. That's a 23% differential to the pessimistic side. The highest level of extreme pessimism in this downtrend SPX 2116-->1812 has been 47% with the biggest differential being 37%. Sounds too bearish, right? It actually does lead to positive intermediate-term returns most of the time, but...


Previous large downtrends have gotten noticeably more pessimistic. Back in August-October 2015, the highest pessimistic extreme reached 56% and the largest differential was 44-47% on several days across a couple months as the bottoming process unfolded. That actually matches the first downtrend of the last bear market in November 2007. The 2nd and 3rd downtrends of that bear market got worse reaching pessimistic extremes of 61% in January 2008, 71% in March 2008, 61% in July 2008 and 70% in October 2008 + with numerous other days and weeks with 50%+ and reaching differentials of 58%, 71%, 61% and 70% in those same time periods respectively with numerous cases of zero optimistic extremes.


If the current bear market follows the same sentiment pattern seen in the last bear market, the current downtrend from SPX 2116 will not likely bounce very high for very long until we see pessimistic sentiment extremes at 60%+ with differentials at 50%+. The current downtrend has fallen well short of those levels thus far.


Their smart/dumb money indicator has similar results, and I must warn that the vast majority of their tools suggest we are at levels typically seen at strong intermediate-term bottoms. In that sense, it's dangerous to be short. The numbers show too many small traders are short and newsletters are too bearish etc etc with VIX being one of the few indicators favoring more downside, so it's perhaps against the odds to bet against the market. However, if we are in a bear market as I believe, sentiment will reach more pessimistic extremes like those seen in CY2007-2009 and perhaps even follow the same pattern which is currently projecting growing pessimism. The trick is to know if that will occur in the next few days or if it will be postponed a few weeks (or perhaps even a few months if you are not persuaded this is a bear market).


So, is this past week the calm before the sentiment storm? Or will the calm extend? And will we even see the pessimistic extremes of the last bear market? You decide. Personally, I believe we will see sentiment extremes similar to the last bear market and it sure feels like analysts are a little too comfortable with SPX and other markets sitting a mere 3-4% above a potential cliff, but, based on all the data I've covered including sentiment, the consolidation over the last few days should be rapidly reaching a decision point in the coming hours to either crash for 2-4 weeks or rally for 2-4 weeks. October to April is supposed to be the strongest half of the year, but February averages 0% which is the 3rd worst month of the year and starts next week. There is a potential 1-day bearish diagonal triangle completing a 5-day H&S with measured target near last week's low, but the 6-day consolidation would also measure up to 1950s-1970s if it breaks higher. Lots of conflicting stats, patterns and counts to parse. If the crash setup fades or implodes without large down moves into Fri/Mon, I will be prepared to flip to the long side, but until then... Good fortune.