It can be said that contrary opinion measures remaining buying and selling power. One key to understanding contrary opinion is if the overwhelming sentiment of market traders is on one side of the market, there is not enough buying or selling pressure left to continue the present trend. How so? Well, if 80-90% of market traders are bullish on a market and have already taken their market positions, who will be left to buy and push the market higher?

Another feature of the contrary opinion philosophy is its ability to compare strong hands versus weak hands. Futures trading is a zero sum game, meaning for every long there is a short. Using numbers, this could translate as, if 80% of the traders are on the long side, then the remaining 20%, who are holding short positions, must be well financed enough to absorb the longs held by the other 80%. In this case, the shorts must be holding positions which are much larger or 4 to 1 over the longs. If the shorts are well capitalized, they will be considered the strong hands. The other traders, the 80% holding smaller positions, are considered the weaker hands and will be forced to liquidate those longs upon any sudden turn in prices.

Some other points to keep in mind should be mentioned here. The norm or equilibrium point is 55%, which allows for a built-in bullish bias on the part of the general public. The upper and lower extremes are also set to allow for bullish bias with the upper extreme at 90% and the lower extreme at 20%.

When the bullish consensus numbers are above 90% or below 20%, it’s considered a contrarian position. Warning zones that suggest a turn may be approaching are above 75% and under 25%. The trader should be on alert when the numbers change direction in one of the danger zones. Nevertheless, he or she is advised to wait for a change in the trend of the numbers before taking action against the trend.

It’s also important to take notice of the open interest in the use of bullish consensus numbers. The general rule is the higher the open interest figures, the better the chance that the contrarian position will be profitable. However, a contrarian position should not be taken if the open interest is increasing because this will increase the odds that the current trend will continue. The trader should wait for the open interest to flatten or decrease before taking action.

It is well worthwhile for the trader to study the Commitments of Traders Report to ensure that hedgers hold less than 50% of the open interest. It is a proven fact that contrary opinion works best when most of the open interest is held by speculators, considered weaker hands, so stay away from trading against large hedging interests.

Traders also need to be aware of the market’s reaction to fundamental news. Should the prices fail to react to bullish news in an overbought area, it is a clear warning a turn may be near. The first bit of adverse news should be enough to quickly push the prices in the opposite direction. Conversely, failure of prices to react to bearish news in an oversold area, under 25%, is a warning all the news was discounted in the current low price, and the trader can expect any bullish news to push the prices higher.

It should go without saying that standard technical analysis tools should be used to confirm market turns during critical times, and trading should continue in the same direction as the trend until market extremes are reached. Although divergences on oscillator charts are especially helpful when the Bullish Consensus numbers are overbought or oversold, other tools such as the breaking of support and resistance levels, trendlines, and moving averages also serve to confirm that the trend is turning.

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.