The medium-term horizon is the most important time frame in technical analysis, since it is the one in which most investors operate. Performance by professional fund managers is measured quarterly, and most mutual fund investors receive statements quarterly.

Measures of psychology, or sentiment indicators, are the best indicators for the medium term. They tell you how bullish and bearish different market participants are.

There are three keys to keep in mind with sentiment indicators:

• Sentiment indicators are only useful when they reach extremes.

• You can’t use sentiment indicators without considering what the market is doing. You need to see three components to signal a bottom in the market:

1) traders liquidating;

2) investors buying; and

3) stability after a decline.

• Sentiment indicators can signal a final top in the market three or four months ahead. However, they usually lead bottoms by only a few weeks.

There are many kinds of sentiment indicators, including polls and transactional indicators. Polls tell us whether people are bullish or bearish. Transactional indicators tell us what investors are actually doing in the market.

• American Association of Individual Investors (AAII) poll of investment club participants.
• Investor’s Intelligence poll of market letter writers.
• Market Vane poll of stock futures traders.
• Consensus Incorporated poll of stock futures traders.