The most common methods of technical analysis use quantitative measures that characterize price movement to determine the future outlook for a particular instrument. Even the popular charting indices (advance/decline lines, overbought/oversold etc.) are based on historical statistics. There is however, another class of indicators that doesn't rely on the mathematical analysis of specific trends or changes in volume and accumulation patterns to produce trading signals. The theory behind these measures is called the Contrary Opinion (generally referred to as Contrarian).

Contrarian indicators are subjective and they don't rely on any specific signals, as opposed to most chart reading methods that measure quantity and quality. The underlying theory is that human nature and the herd mentality affects all investors (and most analysts) because people feel comfortable when they have common beliefs and opinions. Humans tend to coalesce around popular ideas even when there is no substantial evidence to support the base theory. They ignore evidence that would lead to other conclusions. This type of behavior in the market is exhibited in the excessive optimism that investors display just before a significant correction occurs. It is also seen in the widespread negative outlook that emerges as the bottom of a bear market becomes evident. Many professional traders who can identify the opinions of the majority or signals of a consensus will use this knowledge and position their portfolio with the opposite outlook.

The most common Contrarian indicators are the equity put/call ratios and the bullish/bearish sentiment indices compiled by market research services such as Investors Intelligence. The (equity-only) put-call ratio is computed daily by dividing the put volume of all stock options by the call volume of all stock options. This is an excellent contrary sentiment indicator; when too many people are buying calls, it indicates a sell signal for the broad market. The P/C ratio did a fine job of foreshadowing the most recent rally when it moved to its most pessimistic level in a year. Investors Intelligence was one of the first services to exploit the fact that when too many people are bullish on the market, it usually pays to be more defensive. The company started back in the 50's, and they are best known for the Market Sentiment Index. This indicator reflects how many investment newsletters are bullish or bearish on the market.

There are some good examples of how a prevailing theme, played through the media, can become thoroughly accepted among mainstream investors. In August 1987, the sentiment index indicated there were over 60% Bulls compared to 19% Bears. The psychological climate was extremely positive even though a major top was forming. One of the popular headlines said "Dow 3,000: Not If, But When." The Dow would soon drop over 20% in a single day. In December 1994, with the Dow at 3700, there were two weeks in a row with the Bears indicator above 59%, the highest reading in 12 years. Since so many of the other long-term indicators were also turning positive at the time, this was a great opportunity to disregard the fear syndrome gripping Wall Street and start buying. That single move carried the Dow thousands of points higher in the years to follow.

Contrary opinion indicators are valuable tools when used properly but one thing to be aware of is that any technique you subscribe to should always be used to confirm other buy or sell signals from different types of analysis. When these indicators provide well- defined signals that agree with your other gauges, be sure to take the appropriate action.