Friday, January 18, 2008

Capitulation Appearing - But Do We Have Further To Go?

Signs are finally showing that the market is beginning to capitualte, at least on a short-term basis. Thursday saw another day where down volume swamped up volume on the NYSE by more than 9:1. Volume spiked. The price drop was over 2.5% in the major indices. The VIX has finally begun to spike. We seem to be in the midst of a waterfall decline. I ran several tests last night looking for indications that a bounce was immenent. I was dissapointed. Below is one example:

S&P 500 hits 50-day low on the largest decline in 50 days and largest volume in 50 days. Breadth is at least 9:1 negative. Hold X days:





The instances found are as follows:


10/16/87 (and 10/19/87), 10/13/89, 10/27/97, 8/4/98, 8/27/98, 5/17/06, 2/27/07, and 7/26/07.


Some pretty scary selloffs among that bunch. I'd suggest traders review their charts to see those dates. As stretched as the market is, and with breadth, volume, and sentiment indicators all spiking a bounce is surely coming soon. Stepping in too early could make for some hairy trading, though. My Capitualtive Breadth Indicator has only reached "3" at this point. While it doesn't capture every spike lower, I'd be more comfortable getting aggressive if it was at "7" or higher. Nibbling may be ok, but my studies suggest caution is warranted. As I write this in the morning the futures are already bouncing over 1.5%- making for a difficult entry for traders even looking to nibble.


Regards,

Rob

8 comments:

The Market Speculator said...

Interesting stuff. I went back and studied the dates you provided. It is worth noting that the unsuccessful instanced came on dates that were the first major breakdown of the trend, while the playable bounces came on what could be called "second leg" bounces (like 8/27/98). We are currently in the midst of a second (or third) stage breakdown.

Rob Hanna said...

Market Speculator,

Thanks. Interesting observation.

I'm not sure I'm seeing 8/27/98 the same as you. The market did bounce three days later, but it dropped nearly 10% from the 8/27/98 close before doing so. That low was also undercut in October before the market began a real rally.

I'll look at things a bit deeper this weekend per your suggestion and see if there is anything else I might come up with.

Rob

The Market Speculator said...

Rob,
My bad with regards to 8/27/98. I had 8/28/98 confused with 8/27/98.

Rob Hanna said...

Marketspeculator,

No worries. That one instance doesn't neccessarily negate your hypothesis. It still may be worth a closer look. Thanks for sharing your idea.

Rob

Red Hue said...

Seems like this would be a good indicator for shorting the market?

Red Hue said...

In regards to what the Market Speculator mentioned...

I normally wait to see an attempted rally then some measure of "capitualtion" again before looking to get in. Defining an attempted rally has been the trick with me. One could say it was a short rally around the 14th...but none of the indices broke the daily 10ma. I guess what I really look for is some type of 1-2-3 pattern, or perhaps a 2b pattern, which is backed up by breadth. Writing a "filter" for this process is tough though.

Love your blog by the way!

Rob Hanna said...

Red -

Thanks for the notes.

While the study did suggest a good chance at more downside, I felt the market was too oversold on many levels to suggest trying to short.

I also noted the same thing as you about the 10ma. I'll be posting a study involving the 10ma likely tommorrow night (enjoying the extra day off from the market.)

Regards,
Rob

andras said...

I know, it is quite different from your timeframe, but it may provide add on value, to put market action into longer timeframe.

I took current 15 week Rate of Change value of SPX, and examined following movement in approx one year period, with similar (lower) occurences:

Date ----- % chg ------ MAE ------ MFE
1957.10.18 ; 24.89% ; -3.35% ; 24.89%;
1962.05.25 ; 18.58% ; -13.65%; 18.58%;
1966.10.07 ; 32.51% ; -1.26% ; 33.06%;
1970.05.22 ; 42.38% ; -5.04%; 46.16%;
1974.02.08 ; -20.96% ; -33.98% 9.44%;
1981.09.25 ; 7.27% ; -9.37%; 12.90%;
1987.10.23 ; 12.03% ; -12.80% ; 13.89%;
1990.09.28 ; 25.34% ; -3.77% ; 29.92%;
2008.01.18 ; 0.00%

(rows: date, 51 week performance, min, max)

It shows a bit different view when comparing to current expectations.