This week, it seems like everyone is trying to predict when the market will bottom. 

And more often than not, the justifications I hear for these predictions are either fundamental or technical…

An analyst on CNBC will suggest that because the S&P 500 ETF Trust (NYSEARCA: SPY) just crossed the X moving average line or Y resistance level, the bottom is likely in…

Or some dinosaur economist will say that the market can’t bottom yet due to macroeconomic factors of X, Y, and Z. 

While all of these technical and fundamental points have been exhausted to oblivion, I think there’s an even more crucial deciding factor looming in the background of this bear market…

Retail trader sentiment.

In my opinion, the way retail traders are positioning themselves in the options market has meaningfully influenced the SPY’s price action over the past few days.

In times of extreme volatility, such as these, the market will often do the opposite of whatever most retail traders are positioned for.

You must think like a contrarian if you wanna nail short-term trades in this market.

That said, I’m not trying to play the predict the exact bottom. That’s a fool’s errand. But I can tell that, for the first time all year, it feels like the market is trying to bottom (and it’s probably getting close).

So, without playing guessing games … What can you look for amid retail trader sentiment? What hints can you potentially find about future market direction, and where should you look?

Keep reading and I’ll show you…

Why Are Retail Traders Always Left Holding the Bag?

In the past several years, more brokerage accounts have been opened than in any prior period in history.

This means one thing … inexperienced newbies are entering the stock market and gambling.

Take recent history as an example. Retail traders have engineered massive short squeezes in GameStop Corp. (NYSE: GME), AMC Entertainment Holdings Inc. (NYSE: AMC), Bed Bath & Beyond Inc. (BBBY) … the list goes on.

These moves wouldn’t be possible without such a massive influx of young risk-on traders. 

While the aforementioned squeezes are examples of retail traders beating the system … most of the time, the opposite happens.

And in 2022, we’re seeing retail get hammered over and over again on the major index option chains. The ones hammering them are the market makers (MMs)…

Every time you buy contracts, there’s a market maker on the other side of the trade who’s gaining money by selling them to you.

Market makers will do whatever they can to cause the maximum amount of pain for the largest amount of option buyers. 

So, if hundreds of thousands of contracts in a certain strike are flying off the shelves, there’s huge motivation from a) retail traders who want the stock to break the strike price and b) market makers who want the exact opposite to occur.

If highly liquid option chains are like battlefields, then the SPY is the Gettysberg of the 2022 bear market.

And recently, you could’ve made a small fortune by simply doing the opposite of what retail traders have been doing.

But how can you determine which side of the trade retail is on, and which side the smart money is playing? 

How to Gauge Retail Trader Sentiment

Ever since the GME short squeeze, retail traders have taken to message board-style social media platforms like Reddit, Stocktwits, and Twitter Inc. (NASDAQ: TWTR) to share trade ideas and chat up stocks they like (or don’t).

I’m on Twitter every single day, gauging the sentiment of the broader retail trader segment. (Follow me @thehonestcroock — it’s also a great place to send your questions for our Friday Q&As!)

To me, social media is an indispensable resource for getting inside the minds of retail traders.

For example, as soon as the SPY recently began its 8% bounce off the $348 lows, Twitter was awash with newbies calling for $390, $400, $420, and higher … in the next few weeks.

This is madness. A few days of green and these characters have forgotten about the past nine months of nonstop selling. 

But I don’t think these traders are actually crazy … they’re just inexperienced, greedy, and naive.

They buy far out-of-the-money, short-dated options and expect to hit a grand slam overnight. Most of them are wrong. And you can go a long way toward understanding this sentiment by simply paying close attention to social media.

Aside from message boards, you should be keeping a close eye on the SPY options chain…

Reading option chains is a more complex science than perusing social media, but if you get the hang of it, you can get a lot of hints as to where traders are positioning themselves.

Every day, you should open the SPY, look at the chains for the four or five closest-dated expirations, and take note of the following:

• Which strike prices have the most open interest…
• Which strike prices have the most intraday volume…
• Any intraday spikes in implied volatility (IV)…

If you see a strike with a six-figure volume or open interest number beside it, pay close attention. Make a note in your trading journal about that price level and watch it over the next several days.

I think you’ll see what I mean about the market doing the opposite of what retail wants once you start to get the hang of gauging retail sentiment.

Final Thoughts

We’re all trying to make sense of this crazy market. 

It’s even difficult for me, someone who’s been doing this for more than a decade.

But remember … practice makes perfect. 

Focus on your game plan, start paying attention to trader sentiment, and prepare yourself for more head-spinning volatility in the near future.