Psychological line reflects the overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the group's overall investing mentality or sentiment.
While conventional financial theory describes situations in which all the players in the market behave rationally, not accounting for the emotional aspect of the market can sometimes lead to unexpected outcomes that can't be predicted by simply looking at the fundamentals.
Market sentiment is the overall attitude of investors toward a particular security or financial market. IT is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. For example, rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment.
Market sentiment is also called "investor sentiment" and is not always based on fundamentals. It is important to day traders and technical analysts that use technical indicators to measure and profit from the short-term price changes. Market sentiment is also important to contrarian investors that like to trade in the opposite direction of the prevailing sentiment. For example, if everyone is buying, a contrarian would sell.
Market sentiment is generally described as bearish or bullish. When bears are in control, stock prices are going down. When bulls are in control, stock prices are going up. The market is driven by emotion so market sentiment is not always synonymous with fundamental value. That is, market sentiment is about feelings and emotion, whereas fundamental value is about business performance.
Psychological line using trends to assess the market's current psychological state in order to predict whether the market is heading in an upward or downward direction. PSY, as an indicator, is the ratio of the number of rising periods over the total number of periods. It also reflects the buying power in relation to the selling power. If the willing to buy in the market is strong, then market goes bullish/overbought; If the willing to sell in the market is strong, the market goes bearish/oversell.
Overbought is often a term used in technical analysis to describe a situation in which the price of a security has risen to such a degree - usually on high volume - that an oscillator has reached its upper bounds; Oversold is a condition in which the price of an underlying asset has fallen sharply to a level below where its true value resides. This condition is usually a result of market overreaction or panic selling and is generally considered short term in nature. When an asset has been oversold, the price is expected to rebound in an event referred to as a price bounce.
If PSY is above 50%, it indicates that buyers are in control. Likewise, if it is below 50%, it indicates the sellers are in control. If it is above 75% it is bullish/overbought and if it is below 25% it is bearish/oversold. If it is below or above 10% or 90% it is very bearish or very bullish, but also very-oversold and very-overbought, which is a signal to buy or sell. If the PSY moves along the 50% area, it indicates balance between the buyers and sellers and therefore there is no direction movement for the market.