Section 8 - Chapter 2 - Sentiment Measured From Market Data

Section 8 - Chapter 2 - Sentiment Measured From Market Data - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus Visit Site : www.learn.ptaindia.com and www.ptaindia.com

1. Chapter 2 - Sentiment Measured from Market Data Section 8 – Sentiment Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda Sentiment Measured from Market Data VIX Open Interest Commitments of Traders Data Insider Trading Short Interest This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. Volatility Index - VIX Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. VIX (Volatility Index) as a Sentiment Measure 📌 Key Facts About VIX • What is VIX? o The CBOE Volatility Index (VIX) measures market expectations of volatility over the next 30 days. o Derived from S&P 500 options (mainly out-of-the-money puts and calls). o Known as the “Fear Gauge” because it rises during market uncertainty. • How is VIX Calculated? o Uses a weighted mix of S&P 500 index options with near-term expiration dates. o Based on implied volatility, not historical volatility .

5. VIX (Volatility Index) as a Sentiment Measure 📌 Key Facts About VIX • VIX Range & Typical Levels o Below 15: Low volatility, bullish sentiment. o 15-25: Normal market conditions. o Above 25: High volatility, fear in the market. o Above 40+: Extreme panic (e.g., 2008 Financial Crisis, COVID-19 crash). • VIX Trading Instruments o VIX Futures & Options (for hedging/speculation). o VIX ETFs/ETNs like VXX (short-term VIX futures), UVXY (leveraged).

6. VIX (Volatility Index) as a Sentiment Measure Cheatsheet : VIX Interpretation & Market Sentiment VIX Level Market Sentiment Market Behavior Investor Action Below 15 Low fear, complacency Slow upward trends, stable markets Consider hedging against complacency 15 - 20 Normal range Healthy market behavior Neutral stance 20 - 30 Moderate fear Increased volatility, corrections possible Watch for buy opportunities 30 - 40 High fear Market sell-offs, panic setting in Contrarian traders start buying Above 40 Extreme panic Crashes, forced liquidations Potential market bottoms

7. VIX (Volatility Index) as a Sentiment Measure Comparisons: VIX vs. Other Sentiment Measures Metric What It Measures Behavior During Market Stress Use Case VIX Implied volatility of S&P 500 Spikes during downturns Market fear gauge Put/Call Ratio Options activity (puts vs. calls) High ratio (>1) shows bearish sentiment Confirmation tool AAII Sentiment Survey Retail investor sentiment Extreme bullish/bearish readings signal reversals Contrarian indicator CNN Fear & Greed Index Composite of multiple indicators Shifts from greed to fear quickly Broad sentiment view

8. VIX (Volatility Index) as a Sentiment Measure 📈 How to Interpret VIX for Trading & Investing 1. VIX & Market Direction o High VIX (>30) = Fear & uncertainty → Look for market bottoms. o Low VIX (<15) = Complacency → Possible correction ahead. 2. VIX Divergence o If the market falls but VIX does not rise, fear is low, and the drop might be temporary. o If the market rises but VIX stays high, uncertainty remains, and a reversal is possible .

9. VIX (Volatility Index) as a Sentiment Measure 📈 How to Interpret VIX for Trading & Investing 3 . VIX & Stock Market Timing o VIX spikes often mark market bottoms (e.g., 2008, 2020 crashes). o Extreme low VIX suggests overconfidence, possibly preceding a market drop. 4. Trading Strategies o Buying VIX ETFs/VIX options when markets are too calm (anticipating volatility). o Shorting VIX ETFs when fear is extreme (expecting mean reversion ). 🚨 Final Notes on Using VIX ✅ Great for identifying extremes in market sentiment. ✅ Works best with other indicators (like moving averages, RSI, put/call ratios). ❌ Not a directional predictor – high VIX means volatility, not necessarily a crash. ❌ VIX instruments decay over time, making long-term holding risky.

10. VIX (Volatility Index) as a Sentiment Measure 📈 How to Interpret VIX for Trading & Investing 3 . VIX & Stock Market Timing o VIX spikes often mark market bottoms (e.g., 2008, 2020 crashes). o Extreme low VIX suggests overconfidence, possibly preceding a market drop. 4. Trading Strategies o Buying VIX ETFs/VIX options when markets are too calm (anticipating volatility). o Shorting VIX ETFs when fear is extreme (expecting mean reversion ). 🚨 Final Notes on Using VIX ✅ Great for identifying extremes in market sentiment. ✅ Works best with other indicators (like moving averages, RSI, put/call ratios). ❌ Not a directional predictor – high VIX means volatility, not necessarily a crash. ❌ VIX instruments decay over time, making long-term holding risky.

11. Open Interest (OI) in Futures & Options Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

12. 📌 Open Interest (OI) in Futures & Options 🔑 Key Facts About Open Interest (OI) • What is Open Interest? o The total number of outstanding contracts (futures or options) that have not been settled. o It represents new money flow into the market. • How is OI Calculated? o If a new buyer and seller enter a contract, OI increases. o If an existing contract is closed (both buyer & seller exit), OI decreases. o If a trader transfers a contract, OI remains unchanged .

13. 📌 Open Interest (OI) in Futures & Options 🔑 Key Facts About Open Interest (OI) • Difference Between Volume & Open Interest o Volume = Number of contracts traded in a day. o OI = Number of active contracts remaining open. o High volume but low OI = Many traders closing positions. o High OI growth = Strong interest in a trend. • OI Relevance for Futures & Options o Futures: Indicates participation in a trend (higher OI = stronger trend confirmation). o Options: Helps gauge sentiment, liquidity, and potential price movement .

14. 📌 Open Interest (OI) in Futures & Options 🔑 Cheatsheet : Open Interest Interpretation • Growing OI + Strong Price Trend = Strength in trend • Declining OI + Price Move = Weak move, possible reversal OI Trend Price Action Market Interpretation Trading Signal OI ⬆ & Price ⬆ Bullish trend New buyers entering, strong uptrend Confirmed uptrend OI ⬆ & Price ⬇ Bearish trend New sellers entering, strong downtrend Confirmed downtrend OI ⬇ & Price ⬆ Short covering Sellers exiting, weaker downtrend Caution: Trend reversal possible OI ⬇ & Price ⬇ Long unwinding Buyers exiting, weaker uptrend Caution: Trend reversal possible OI Flat & Price ⬆⬇ Consolidation No strong participation Wait for breakout

15. 📌 Open Interest (OI) in Futures & Options 📈 How to Interpret Open Interest for Trading 1. Futures Trading with OI o High OI in trending markets = Strong trend continuation. o Decreasing OI with price movement = Weakening trend, possible reversal. 2. Options Trading with OI o High OI in options = Liquidity & institutional interest. o Low OI = Illiquid market, potential high spreads. o Unusual OI spikes = Potential insider activity or big money positioning. 3. Using OI in Combination with Other Indicators o OI + Volume: High OI + High Volume = Strong momentum. o OI + IV: High OI + Rising IV = High speculation, possible breakout. o OI + PCR (Put-Call Ratio): High OI in puts & rising PCR = Bearish sentiment.

16. 📌 Open Interest (OI) in Futures & Options 🚨 Final Notes on Using Open Interest ✅ Confirms trend strength when paired with price action. ✅ Best used with volume & volatility indicators. ❌ High OI alone doesn’t indicate direction—it must be analyzed with price action. ❌ Low OI means low liquidity, leading to higher spreads.

17. 📌 Put/Call Open Interest Ratio Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

18. Put/Call Open Interest Ratio 🔑 Key Facts About the Put/Call Open Interest Ratio (PCR OI) • What is the Put/Call Open Interest Ratio? o Measures the ratio of open interest (OI) in put options vs. call options. o Used to gauge overall market sentiment (bullish or bearish). • Formula: PCR OI = Total Put Open Interest/Total Call Open Interest PCR > 1 → More put open interest (bearish sentiment). o PCR < 1 → More call open interest (bullish sentiment ).

19. Put/Call Open Interest Ratio 🔑 Key Facts About the Put/Call Open Interest Ratio (PCR OI) • Difference Between PCR OI and PCR Volume o PCR OI: Based on open interest → Measures long-term positioning. o PCR Volume: Based on daily volume → Measures short-term trading sentiment. • Why is PCR OI Important? o Helps traders understand whether investors are hedging, speculating, or shifting sentiment. o Extremes in PCR OI can signal trend reversals (contrarian indicator).

20. Put/Call Open Interest Ratio 🔑 Cheat sheet : Interpretation of PCR OI PCR OI Value Market Sentiment Interpretation Trading Signal Below 0.5 Strong Bullish Traders are aggressively buying calls Possible market top (overbought) 0.5 - 0.8 Mild Bullish Calls are dominant, steady uptrend Confirmation of bullish sentiment 0.8 - 1.0 Neutral Balanced market positioning No clear signal 1.0 - 1.3 Mild Bearish More puts being opened, cautious outlook Possible downtrend Above 1.3 Strong Bearish Investors are hedging heavily with puts Possible market bottom (oversold) 🔹 Contrarian View: • Very high PCR (>1.3 - 1.5) → Too much fear → Possible reversal up. • Very low PCR (<0.5) → Too much greed → Possible reversal down.

21. Put/Call Open Interest Ratio 🔄 Comparisons: PCR OI vs. Other Sentiment Indicators Indicator What It Measures Best Used For Key Difference from PCR OI PCR OI Put vs. Call open interest Long-term market sentiment Based on outstanding contracts, not daily activity PCR Volume Put vs. Call daily trading volume Short-term sentiment shifts Measures daily transactions, not ongoing positions VIX (Volatility Index) Expected market volatility Fear & uncertainty gauge PCR OI shows positioning, VIX shows expected swings Open Interest (OI) Total active contracts Trend strength confirmation PCR OI focuses on the relative balance between puts and calls Put/Call Ratio (Equities) Puts vs. Calls in stock options Sentiment in individual stocks PCR OI is for index sentiment, not single stocks

22. Put/Call Open Interest Ratio 🔄 How to Use PCR OI for Trading & Investing 1. Trend Confirmation o Rising PCR OI above 1 suggests increasing bearish sentiment. o Falling PCR OI below 1 suggests increasing bullish sentiment. 2. Contrarian Indicator for Reversals o Extremely high PCR OI (>1.3 - 1.5) → Too much bearishness → Market bottom approaching. o Extremely low PCR OI (<0.5) → Too much bullishness → Market top approaching. 3. Using PCR OI with Other Indicators o PCR OI + VIX:  High PCR OI + Rising VIX → Extreme fear → Possible market bottom.  Low PCR OI + Falling VIX → Extreme greed → Possible market top .

23. Put/Call Open Interest Ratio 🔄 How to Use PCR OI for Trading & Investing 4. PCR OI + Open Interest: High PCR OI + Rising OI → Bearish sentiment strengthening. Low PCR OI + Falling OI → Weak bullish conviction . 🚨 Final Notes on Using PCR OI ✅ Great for measuring overall sentiment shifts in options markets. ✅ Works well as a contrarian indicator at extreme levels. ❌ Should not be used alone—combine with price action, OI, and volatility metrics. ❌ A high PCR OI doesn’t always mean a crash—it could also indicate hedging activity .

24. Commitments of Traders (COT) Data Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

25. Commitments of Traders (COT) Data Key Facts About Commitments of Traders (COT) Data • What is COT Data? o A weekly report published by the Commodity Futures Trading Commission (CFTC) every Friday. o Shows positions held by different trader groups in futures markets (commodities, currencies, indices, etc.). o Used to analyze market sentiment, trends, and potential reversals. • Who Reports to CFTC? o Large traders, commercial hedgers, and institutions must report their positions. o The report is divided into different trader categories.

26. Commitments of Traders (COT) Data Key Facts About Commitments of Traders (COT) Data • COT Report Categories: 1. Commercial Traders (Hedgers) → Businesses using futures to hedge risk (e.g., farmers, oil companies). 2. Non-Commercial Traders (Speculators) → Large institutions, hedge funds, and traders who speculate for profit. 3. Retail Traders (Small Speculators) → Small individual traders. • Why is COT Data Important? o Shows what big players are doing in futures markets. o Helps traders identify bullish or bearish sentiment shifts. o Used to detect trend reversals when large traders suddenly change positions.

27. Commitments of Traders (COT) Data Cheatsheet : How to Interpret COT Data • Hedgers reduce risk → Take opposite positions from speculators. • Speculators drive trends → Follow their positioning. • Retail traders are often wrong → Their extreme positions can indicate reversals . Trader Type What They Do When They Increase Positions Interpretation Commercial Traders (Hedgers) Hedge price risk, not profit-driven Typically buy during market bottoms, sell during market tops Contrarian indicator – they buy when prices are low and sell when high Non-Commercial Traders (Speculators) Trade for profit, trend followers Follow trends; buy in bull markets, sell in bear markets Trend confirmation – if they add to positions, trend may continue Small Speculators (Retail Traders) Small retail investors, often uninformed Usually wrong at market extremes Contrarian indicator – if they are overly bullish or bearish, reversal may be near

28. Commitments of Traders (COT) Data 🚨 Final Notes on Using COT Data ✅ Great for long-term market sentiment analysis. ✅ Helps track what "smart money" (hedgers & institutions) is doing. ❌ Not a short-term trading tool – updated only weekly. ❌ Should be used with price action and technical indicators for confirmation.

29. Insider Trading as a Sentiment Tool Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

30. Insider Trading as a Sentiment Tool Key Facts About Insider Trading as a Sentiment Tool • What is Insider Trading? o Legal Insider Trading: Corporate executives, directors, and employees legally buy or sell their own company's stock while following SEC regulations (e.g., Form 4 filings). o Illegal Insider Trading: Buying or selling stock based on non-public material information (e.g., earnings leaks). • Why Insider Trading Matters for Market Sentiment? o Insiders know more about their companies than the public, so their buying/selling activity can signal future stock movements. o Insider Buying = Bullish Signal (Insiders believe the stock is undervalued). o Insider Selling = Bearish or Neutral (Could mean insiders think the stock is overvalued or they need liquidity).

31. Insider Trading as a Sentiment Tool Key Facts About Insider Trading as a Sentiment Tool • Key Insider Trading Reports (SEC Filings): o Form 4 → Discloses insider transactions within 2 business days. o Form 144 → Announces planned sales of restricted stock by insiders. o Schedule 13D/13G → Discloses when an investor takes a large position (5%+ ownership). • Not All Insider Selling is Bearish! o Executives may sell for personal reasons (diversification, taxes, etc.). o Cluster Buying (multiple insiders buying together) is a stronger bullish signal.

32. Insider Trading as a Sentiment Tool Insider Activity Market Sentiment Interpretation Trading Signal Heavy Insider Buying (especially by top executives) Strongly Bullish Insiders confident in future growth Buy signal Cluster Buying (Multiple insiders buying at once) Very Bullish Strong internal confidence in stock Strong buy signal CEO/CFO Buying Bullish Key decision-makers see upside potential Positive for stock Heavy Insider Selling Neutral to Bearish Could signal stock is overvalued Caution, but not always bearish Selling with No Clear Reason Bearish If selling is widespread and not tied to scheduled sales Potential warning Insider Selling During Market Drops Bearish Loss of confidence in company's resilience Avoid or short sell Insider Selling but Stock Price Still Rising Neutral to Bullish Could be profit-taking, not necessarily a bad sign No action needed 🔹 Key Takeaways: • More weight should be given to insider buying than selling. • Cluster buying (multiple insiders buying) is the strongest bullish signal. • CEO/CFO transactions are more significant than lower-level executives.

33. Insider Trading as a Sentiment Tool 📈 How to Use Insider Trading for Investing & Trading 1. Look for Cluster Buying o Multiple insiders buying in a short period is a strong bullish signal. o More important when no bad news is present. 2. Monitor CEO & CFO Transactions o The CEO and CFO have the best insight into the company's future. o If the CEO/CFO buys significant amounts, it’s a strong bullish signal. 3. Compare Insider Selling with Historical Patterns o Some executives routinely sell stock as part of compensation (e.g., Elon Musk, Jeff Bezos). o Selling alone is not bearish unless it’s unusual or excessive. 4. Check Timing Relative to Major Events o Insider Buying before earnings or major news → Insiders expect strong performance. o Heavy Selling before negative news → Could signal trouble ahead.

34. Insider Trading as a Sentiment Tool 🚨 Final Notes on Using Insider Trading as a Sentiment Tool ✅ A great way to track executive confidence in their own company. ✅ More reliable than analyst recommendations. ✅ Best used for long-term stock investing. ❌ Not useful for short-term trading—insiders buy/sell based on long-term expectations. ❌ Selling isn’t always a bearish signal (executives sell for personal reasons).

35. Short Interest as a Sentiment Measurement Tool Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

36. Short Interest 🔑 Key Facts About Short Interest • What is Short Interest? o Short interest measures the total number of shares sold short but not yet covered (bought back). o Expressed as a percentage of total shares outstanding or in absolute numbers. • Why is Short Interest Important? o Indicates bearish sentiment when high (investors expect price declines). o Extremely high short interest can lead to short squeezes, causing rapid price spikes.

37. Short Interest 🔑 Key Facts About Short Interest Key Metrics Related to Short Interest: 1. Short Interest Ratio (SIR) or Days to Cover Formula : SIR=Total Short Interest/Average Daily Trading Higher SIR = More bearish sentiment, longer to cover shorts if squeezed. 2. Short Interest as % of Float Formula : Short Interest % = (Total Shorted Shares/Public Float )*100 - Above 10% → Moderately high short interest. - Above 20% → Extreme short interest (high risk of short squeeze).

38. Short Interest 🔑 Key Facts About Short Interest • Short Squeeze Potential o Occurs when heavily shorted stocks suddenly rise, forcing short sellers to buy back shares, accelerating price increases. o Catalysts: Positive earnings, news, or technical breakouts. o Famous Example: GameStop (GME) short squeeze in 2021.

39. Short Interest Cheatsheet : How to Interpret Short Interest Short Interest Level Market Sentiment Interpretation Potential Signal Low (<5%) Bullish Few investors betting against the stock No major risk from shorts Moderate (5-10%) Neutral Balanced sentiment No strong signal High (10-20%) Bearish Significant short selling activity Potential for a short squeeze if demand rises Very High (>20%) Extreme Bearish Market expects a price drop High risk of a short squeeze on positive news SIR (Days to Cover) > 5 Bearish More time needed for shorts to cover More squeeze potential if stock rises SIR (Days to Cover) > 10 Extreme Bearish Hard for shorts to exit quickly High risk of explosive upside move 🔹 Key Takeaways: • High short interest signals bearish sentiment but also short squeeze risk. • Stocks with high SIR (Days to Cover) and rising prices can trigger short squeezes. • Low short interest suggests strong confidence in the stock.

40. Short Interest 🔑 How to Use Short Interest for Trading & Investing 1. Identify High Short Interest Stocks for Short Squeeze Potential • Look for Short Interest > 20% and SIR > 5. • Monitor price action and volume – if the stock is rising, shorts may be in trouble. 2. Confirm Bearish Trends with Short Interest Data • If short interest is rising over time, it signals growing pessimism. • If price keeps falling alongside high short interest, the bearish trend may continue. 3. Combine with Technical & Fundamental Analysis • If a stock with high short interest breaks out on strong volume, a short squeeze could happen. • Watch earnings reports – a positive surprise can cause short sellers to panic and buy back shares .

41. Short Interest 🚨 Final Notes on Using Short Interest as a Sentiment Tool ✅ Useful for identifying short squeeze candidates. ✅ Strong indicator of market pessimism when high. ❌ Short selling can be risky – stocks with high short interest can remain bearish. ❌ Short interest data is not updated daily – use in combination with technical signals.

42. Real-World Short Squeeze Examples & Tools to Track Short Interest Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

43. Short Interest 🔥 Famous Short Squeeze Examples 1. GameStop (GME) – 2021 • Short Interest: Over 140% of the float (extremely high). • Catalyst: Retail traders ( Reddit’s r/ WallStreetBets ) & call option buying. • Result: Price surged from ~$20 to $483 within weeks. • Takeaway: Extreme short interest + retail participation + momentum = historic squeeze. 2. Volkswagen (VW) – 2008 (The “Mother of All Short Squeezes”) • Short Interest: Hedge funds heavily shorted VW. • Catalyst: Porsche revealed it secretly owned 74% of VW stock, making it impossible for shorts to buy back shares. • Result: VW stock skyrocketed ~400% in two days, briefly making it the world’s most valuable company. • Takeaway: Low float and strategic moves can create legendary squeezes .

44. Short Interest 🔥 Famous Short Squeeze Examples 3. Tesla (TSLA) – Multiple Short Squeezes (2019-2020) • Short Interest: 20-30% of float at peak. • Catalyst: Strong earnings, increased deliveries, and stock inclusion in S&P 500. • Result: TSLA surged over 700% in 2020, forcing shorts to cover. • Takeaway: High short interest + strong fundamentals = long-term squeeze potential.

45. Short Interest Best Tools to Track Short Interest . 1. FINRA Short Interest Data (Official Data) • Link: https://www.finra.org/ • Provides bimonthly short interest reports for stocks. 2. Nasdaq & NYSE Short Interest Reports • Link: https://www.nasdaq.com/market-activity/short-interest • Updates every two weeks, showing total shorted shares. 3. Ortex & S3 Partners (Paid Services, Real-Time Data) • Link: https://www.ortex.com/ • Provides real-time short interest estimates and “borrow fee rates” (cost to short). • Key feature: Shows cost to borrow → higher borrow rates mean harder to short. 4. MarketWatch & Yahoo Finance • Example: Search "Tesla short interest MarketWatch " to get up-to-date data. • Link: https://www.marketwatch.com /

46. Short Interest 🚀 How to Identify a Potential Short Squeeze Before It Happens ✅ Step 1: Look for High Short Interest • 20%+ Short Interest of Float = High squeeze potential. • Short Interest Ratio (Days to Cover) > 5 = Hard for shorts to exit fast. ✅ Step 2: Check Borrow Rates & Options Flow • If the cost to borrow (fee for shorting) is rising → Fewer shares available to short. • Unusual call option buying can indicate a possible squeeze (options fuel gamma squeezes).

47. Short Interest 🚀 How to Identify a Potential Short Squeeze Before It Happens ✅ Step 3: Monitor Price & Volume Movements • If the stock starts moving up fast on high volume, shorts may be covering. • Breaking key resistance levels can accelerate the squeeze. ✅ Step 4: Check Insider & Institutional Holdings • Low float + insider/institutional ownership = fewer shares for shorts to cover. 🚨 Key Takeaways on Short Squeeze Trading ✅ High short interest stocks can rally fast, but timing is crucial. ✅ Look for catalysts (earnings beats, news, retail hype, options activity). ✅ Risk management is key – short squeezes can reverse quickly.

48. Next Chapter 3 - Sentiment Measures from External Data Section 8 – Sentiment Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia