How would you trade when market sentiments conflict with technical analysis?

There are two types of market sentiments - bullish or bearish. Stock prices rise when bulls are in control. And stock prices fall when bears are in control. Market sentiment is about emotions, whereas fundamental analysis (FA) is about business performance. So market sentiment is not always based on fundamentals.

Technical analysts (TA) rely on market sentiment, as it influences the technical indicators they utilize to measure and profit from short-term price movements often caused by investor attitudes toward a stock. Market sentiment is also important to contrarian investors who like to trade in the opposite direction of the crowd. For example, if most people are buying, a contrarian would sell.

Stock sentiment analysis can be used to determine investors' opinions of a specific stock. Sentiment may at times hint at future price action. Companies can leverage artificial intelligence (AI) and machine learning (ML) techniques to apply sentiment analysis to understand how the market prices will change over time and take necessary action to buy, sell, or hold their stocks accordingly.

There are various factors that influence stock sentiment, which include news and social media. These factors help influence stock sentiment as they impact market volatilty, trading volume and earnings. Stock sentiment alone cannot always predict changes in prices, but a better understanding can be gained when combined with TA.

Fig. 1 shows the sentiment analysis (SA) for a stock. SA is valuable as it can help to determine investors' opinions. In times of high volatility, prices can be much more prone to rapid changes. Positive comments on social media platforms and news, may cause euphoria in the market and push investors to overwhelmingly buy a stock. The opposite can also be true when negative news is released, which may cause fear and cause massive selling in a stock. That initial rush of euphoria or fear, especially comments from someone influential, may create outsized moves in the market and quickly result in overbought or oversold conditions.

When technical indicators reach extreme levels, traders may begin to see a reversal as more likely. Similarly, the same can be perceived when sentiment is at extreme levels. For example, if 90% of retail clients are long a specific stock, this could be seen as a bearish signal. Then there may be a trend reversal and the price may fall.

TA uses historical data to predict future price action. SA uses current market sentiments. However, it's important to remember that the future is not necessarily predetermined by the past, and unexpected events or changes in market conditions can disrupt trends. Hence, current market sentiments may overide technical indicators.

Anxiety in the tech community quickly escalated through social media, mainly Twitter. "SVB" was tweeted about roughly 200,000 times on Mar 9, with several founders and CEOs of tech companies posting about pulling money from the bank.

"OK i am hearing from dozens of founders about what to do at SVB. It's an all out bank run," founder Howard Lerman tweeted on the same day when SVB was trying to raise new capital.

"The thing about a bank run is that there's no upside to keeping your money in the at-risk bank," wrote Xavier Helgesen of Enduring Ventures the same day.

The tweets from the influential people caused the sentiment to be very bearish. The stock plunged that day. Although TA was flashing oversold, the price continued to fall below the RSI of 20 because of the panic selling.

By the next day, depositors had tried to withdraw USD42 b from SVB. The bank was shut down by regulators and taken over by the Federal Deposit Insurance Corporation.