WAITING FOR CAPITULATION

The markets are in a doldrums, as the NFP (NonFarm Payroll) reports confirmed another minus
63K of job losses last month. The US looks like its in a recession, or is it? The S&P500 has
taken a hit and has broken down our so-called "triangle of hell." Fxoptions course students can
see the fake out to the upside of the triangle which was eventually stopped dead in its tracks.
(Fxoptions students would not have traded this fake out because they knew the market was going down due the commitment of traders on the VIX as well as the 10 Year Treasuries futures....How smart is that?). Look at the Triangle for yourself.

I am eager to see how the KLCI does on Monday (11/3) morning. What's the implication of the ruling National Front losing its 2/3 majority? Should make the local market a good buy once we get capitulation on the S&P.

So what is capitulation and how do we recognise it? Taking this definition from Investopedia, "In the stock market, capitulation is associated with "giving up" any previous gains in stock price as investors sell equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling. After capitulation selling, it is thought that there are great bargains to be had. The belief is that everyone who wants to get out of a stock, for any reason (including forced selling due to margin calls), has sold. The price should then, theoretically, reverse or bounce off the lows. In other words, some investors believe that true capitulation is the sign of a bottom."

Here are some telltale signs of capitulation:
1. A VIX Spike - usually to above 37. Due to the volatile nature of the markets, don't be surprised
if $VIX spikes to 45-50, as was the case in the late-1990s and early 2000s.
2. $VXO spiking above the Bollinger Band. Be careful as VXO might (and will) climb up the Bollinger
Band without peaking. You need experience to tell.
3. A sudden reversal in stocks after a seemingly bottomless pit. The recovery is fast and furious.
We'd normally like to see multiple tests of the lows before committing. Also, recoveries can take
place much later in the day.
4. An extremely HIGH VOLUME day, giving credence to the turnaround (instead of it merely being a "dead cat" bounce.
(Note; Those who are more adventurous could also wait for the $TRIN to go above 3.5)

Here's what the most recent capitulation looked like (Source: Shadowtrader, Redoption)

Happy Capitulating and make it GREEN with PROFITS!

Chief Shook