Capitulation bottom

By Jani Ziedins | End of Day Analysis

Oct 01
S&P500 daily at end of day

S&P500 daily at end of day

End of Day Update:

It was another brutal day, smashing through prior support at 1,965 and ultimately closing under 1,950. Volume was some of the highest we’ve seen all year as traders reacted to both headlines and technical weakness. But the thing we must remember is routine dips only happen when everyone thinks the market is on the verge of plunging even lower. If everyone was confident this was little more than a buyable dip, they wouldn’t sell. If no one sells, prices don’t dip. Therefore by rule, to get the dip, we always need to scare a large number of people into selling. And clearly we’ve done that here. But what comes next? Is this really just another vanilla dip? Or the start of a larger correction?

Despite all the prognostications of the bull’s demise, we haven’t done any real technical damage yet and the up-trend remains comfortably intact. The real threat won’t come until we undercut August’s dip to 1,900, making a new lower-low. Bouncing anytime in the next 40-points still counts as a higher-low and extends this resilient bull market.

The real test will come in the next few days. Capitulation bottoms typically smash through support on huge volume. This is the point of maximum pain where previously confident owners cannot bear the mounting regret of not selling earlier and reactively pull the plug. Unfortunately for many, this breaking point typically happens near the bottom of the move. Once the last wave of impulsive selling washes through the market, supply dries up and we bounce. Today’s dip had all the hallmarks of a traditional capitulation bottom.

But nothing in the market is ever clear-cut and one-sided. Rather than bounce, there is the real possibility today’s weakness will convince even more owners to sell in coming days, once they are pushed to their breaking point. Nothing rattles confidence like seeing everyone else running for cover and a bad open could lead to another bloodbath.

This appears like another cookie cutter dip and capitulation bottom, but we will know the answer for sure in a couple of days. A decent trade is buying the dip and using recent lows as a stop.

Jani

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.

Matt October 2, 2014

Capitulation!?? A couple of modest down days in a runaway multiyear bull market and we’re crying about capitulation?

    Jani Ziedins October 2, 2014

    Every dip over the last 5 years ended in capitulation after a few percent decline, why should this time be any different?

jim October 3, 2014

Great article, you are appreciated .

Looking at August, it doesn’t really look like capitulation in its pure form, just a nice plunked down bottom – today looked like a actual mini capitulation but capitulation all the same.

I think even if we ride it down to august low, to a double tap bottom, as you said – the big trend is still viable.

thanks, I always enjoy your thinking

S Powser October 9, 2014

I sure don’t think you use the term capitulation correctly.

True capitulation is marked with total disgust with the market and resolve never to re-enter. Capitulation cannot occur when 99% of the participants are still above water!

What you witnessed and charted is not even a correction.

    Jani Ziedins October 9, 2014

    Analysis in the market is always tied to timeframe. Capitulation for a day trader is far different than a 25 year old investing in a 401k. Capitulation is simply a purge and rebound within a stated timeframe due to traders using a similar timeframe throwing in the towel. I’m a swing trader and look for reversals inside of weeks or months. Over the last few years there have been countless examples of the market crashing through support, only to decisively rebounding once the selling dried up. That is the capitulation point for short-term traders. We only break the nerve of the 401k public a couple times a generation and it will be at least another decade before we live through another 2008.

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