When using oscillator analysis to study the market extremes, one of the most widely followed theories is the principle of Contrary Opinion. Contrary Opinion adds an important third dimension to market analysis, the psychological. This psychological analysis determines the degree of bullishness or bearishness among participants in the markets.

By definition, the principle of Contrary Opinion means that when the vast majority of people agree on anything, they are most generally wrong. So to be a true contrarian, a trader will first try to determine what the majority are doing and will then act in the opposite direction.

Humphrey Neill described his Contrary Opinion theories in his 1954 book, The Art of Contrary Thinking. James Sibbet in 1964, applied Neill’s principles to the futures market and created the Market Vane advisory service. The Market Vane compiles a weekly poll of market letters which is used to determine the degree of bullishness or bearishness among commodity professionals. The poll quantifies market sentiment into a set of numbers used to analyze and forecast the market. This approach rationalizes that most futures traders are greatly influenced by market advisory services, and therefore, by monitoring the views of the professionals, a fairly accurate gauge of the attitudes of the trading public can be gathered.

Consensus National Commodity Futures Weekly also provides a service which monitors market sentiment. It is the “Consensus Index of Bullish Market Opinion” in which a number above 75% will designate an overbought market and under 25% an oversold market.

The 75%, 25% measurements are the most widely used by traders to analyze the weekly numbers provided. Measurements above the 75% may also mean a top is near and under 25% warns of an approaching bottom.

Andy Swan is co-founder and head trader for DaytradeTeam.com. To get all of Andy's day trading, swing trading, and options trading alerts in real time, subscribe to a one-week, all-inclusive trial membership to DaytradeTeam by clicking here.