Contrarians look for signals that a market might be overheated, or undervalued. The basic logic is simple. When everybody is bullish, most people are also fully invested. Hence, there are no resources to drive share prices up further. Demand drops in such situations.
In contrast, when everybody is bearish, most people have also finished selling. Hence, there is no further supply of shares. While everybody is vocally pessimistic, the lack of selling means the market maybe set for a recovery.
In both cases, logic indicates trading volumes should decline, followed by trend reversal. Indeed, there is usually a decline in
