Market sentiment indicators (put/call ratio, investor surveys, VIX) can supplement wave count analysis by confirming extremes in crowd psychology.
Description
Elliott Wave Theory is rooted in the study of mass psychology. Sentiment indicators measure the current level of bullishness or bearishness among market participants. Extreme optimism tends to occur at wave 5 peaks; extreme pessimism appears at wave 2 lows and wave C lows. These readings can confirm wave count turning points.
Key Points
- Extreme bullish sentiment at wave 5 or wave B tops → confirms potential reversal
- Extreme bearish sentiment at wave 2 or wave C bottoms → confirms potential reversal
- Useful indicators: put/call ratio, investor surveys (AAII, Investors Intelligence), VIX, margin debt
- Sentiment is a contrary indicator: extreme readings suggest the crowd is positioned incorrectly
- Use sentiment as confirmation, not as a primary wave counting tool
