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Trader's Corner

Capitulation

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You hear trader and analyst types talk about 'capitulation', referring to the final stage of these relentless type free fall declines such as may have wrapped up today. Capitulation means to throw in the towel. It's where you see or feel yourself the attitude expressed by 'get me OUT of this market, I can't stand it; this thing is never going to STOP going down. Since the market is so driven ultimately by investor psychology and expectations, capitulation is a powerful and cathartic event that often is associated with market bottoms and stabilizing prices.

Charles Dow didn't use the term capitulation that I recall reading about him, but did talk about the same emotional state of mind. The final sort of panic selling, where people feel that if they don't exit they are going to lose their shirt; and the vacation house and the second car, etc! Or, in this day and age, the panic may be to retirement money socked into stock mutual funds in their 401k plans.

Someone I listed to last night on one of the market wrap shows talked about bottoms coming in a final 'accidental event'; by that, meaning some final bit of bad news that causes the last bit of selling for awhile anyway; and, after this news comes out, market participants figure, 'well, the worst is over'.

I look at capitulation somewhere differently and use and tend to rely on my equities call to put daily volume indicator for the CBOE. I look for a simple ONE-DAY reading that suggests put volumes are close to equaling call volume. This event tends to reflect that same type emotional trigger as what the other gentlemen I mentioned was talking about. There has not been such a 'capitulation' type day in my call to put volume ratio yet in the past week and half's relentless further decline.

Trading volumes that are far above the average daily volume is another type of event that can reflect capitulation. You can track total exchange volumes to get an idea of when this happens or use a proxy, like the daily volume numbers for the Nasdaq 100 tracking stocks, symbol QQQQ.

I thought that the Thursday, 6/8 QQQQ volume spike might be a capitulation type 'volume climax' as day saw a big spike in trading volume. Actually the Q's haven't fallen all that much further since then and volume, as they say, often PRECEDES price (turnarounds).

Market sentiment is a major way to measure capitulation by traders and investors. Sometimes the market will reach a bottom, rebound a bit or even substantially, then drop back to the area of the prior lows, maybe even dip under the prior intraday low. This type action is sometimes when I will see at least a 1-day jump in put volume, relative to call activity, where put volume gets close to equaling call volume.

A retreat to a prior low is another way to gauge a milder form of 'capitulation'. Investors decide that they just aren't going to buy unless one key major index or the indexes in general get back to some important prior low. The Nasdaq 100 (NDX) has now retraced all of its gains made since its October bottom.

And, I've noticed over the last 2-3 days some of the key Nasdaq biggies (big cap stocks) are starting to find some supporting buying interest.

There are other instances where there is no particular single capitulation event or news, nor a major spike in volume associated with emotional type single selling climaxes, but the market starts to show greater relative strength, with selling slowing down or drying up. NYSE and Nasdaq UP volume, especially on a 10-day moving average basis, contracts to a low level, hitting a reoccurring 'baseline' amount; this is close to happening in the Nasdaq, for the second time since the 4th week in May. That first instance, obviously NOT being associated with a bottom.

There are some charts that will illustrate some bottoming type indications, but do NOT YET illustrate the capitulation type selling trigger or jump in put volumes. Prices may lift some and these events come later, without prices necessarily sinking further or much further than they already have. Prices may of course just KEEP falling. I like to be ready and I can be early, once or twice on covering puts and doing some index call buying.

This is why I use close by stop or exit points in such circumstances. It's my particular style to try and ANTICIPATE significant tradable lows. I sometimes think it's my laziness in not wanting to 'stay glued to the tube' and be watching the market every minute for the definite signs of a reversal; that quick price rise and volume surge off a bottom. Besides I have other projects and business activities besides trading and watching the markets. I like to think it's the greatest challenge and ultimate satisfaction in figuring out the market's next move before it's upon us.

SOME CHARTS & MUSINGS RELATED TO THE ABOVE:

The S&P 500 (SPX) has retraced now 2/3rds or 66% of its last big run up. In an uptrend, once a retracement of a prior move gets to be more than 2/3rds, there is the strong possibility that the price will fall back to the area of the previous low.

Where SPX got to today is the area where it should stage a rally to start to at least inch above today's low, IF the Index is going to retrace part, not ALL, of its prior move. Stay tuned on that! A close under 1221, not reversed back to the upside the next day, starts to make the bullish prospects look dimmer.

The S&P 100 (OEX) daily chart below illustrates a couple of technical aspects not related just to retracements. But before leaving that subject, OEX has obeyed my two-day rule so to speak. The index closed under what is its 66% retracement yesterday but rallied the next day (today) back above this level.

This technical action may suggest that this group of stocks is digging into an area where there is buying interest (support). OEX and Dow 'bellwether' GE is holding up much better than the overall index, which should be encouraging to the bulls.

OEX is also oversold, but the retreat in the RSI seen above is not down as far as the price level seen when the RSI hit its low to date. This action is suggestive of a possible bullish price/RSI divergence. Stay tuned on that!

We still haven't seen the 'capitulation' event that would be suggested by my call to put volume ratio (lowermost section of the chart above) dipping into the 'oversold/extreme bearishness level'; but it has gotten closer. A rally followed by another slam might get that indicator line down again in that area. Or, just more of the same: relentless decline.

The Dow 30 (INDU) as shown in my next chart seems to have found some price stability and buying interest in the area between the 62 and 66% retracement. It's not unusual to see prices stabilize in this zone or after having this much of a decline. This event coupled with the oversold extreme suggested by the 21-day stochastic oversold reading, may suggest some follow through buying.

This is not to say leap into Dow Index (DJX) calls on this prospect. Even if today is a low for this move, there is usually another low made at or a bit above the first, before the Index is worth buying. It can take awhile for a bottom to form and call premiums erode way before a next rebound, which is often when there's a more sustained and faster upswing.

Reminds me of the Rock & Roll song, about you 'can go your own way', as the Nasdaq goes its own way. The Nasdaq Composite, as seen in this next chart, has exceeded a 2/3rds retracement of the last big advance and is getting close to a round trip 100% retracement of it. A retreat to the 2025 area, but not lower or much lower, sets up the possibility of a double bottom. But the Nasdaq 100 (NDX), which is the next chart after COMP is already there, having retraced ALL of its prior move.

The RSI is not 'confirming' this latest price low by its own move to a new low, which sets up a possible advance reading of a trend turnaround or rebound. Stay tuned on this prospect!

The Nas 100 (NDX) chart, big cap tech, is showing now a possible, emphasis on 'possible' double bottom low. Did I tell you that I LOVE to buy double bottoms, and short double tops. Good reliable chart patterns a lot of the time. And, you know where to put your stop out point; i.e., just under 1515 in the case of NDX.

There is a more pronounced bullish price/RSI divergence apparent in the NDX chart above than was seen in COMP. I did say 'possible' right? Stay very tuned in on this over subsequent days!

The NDX chart weekly chart next and last, is interesting in terms of the possible double bottom low idea I've spoken about above.
The noteworthy pattern in the NDX long-term chart below is that the Index has to date held above the low end of its uptrend channel, which intersects in the low-1500 area.

If NDX holds above the 1500 level, especially on a weekly close basis, then starts to work higher over time, then it's most likely a heck of buying opportunity ahead.


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