9:00am (EST)
We love using fancy words from time-to-time and yesterday we got to use one that we only get to spit out of our vocabulary every blue moon. Wednesday’s market action was jaw-dropping, spectacular, but read like a book and from what we said it could have been a sign of capitulation.
Capitulation is when panic and pain, nervousness and an uneasy feeling that you are about to give up all of your gains for the year, set in and most investors jump ship and sell everything to get out of the market. Some switch to safer investments some stay in cash, and some swear off the market forever. Gold is at $1650 an ounce.
After 8 days of selling pressure, the market was bending but had not broken so at some point we knew a bounce would come. Capitulation selling often leaves 4-star stocks selling at 2-star rates so the theory is that there are bargains to be had as stocks get cheaper. Of course, not one talking head mentioned this word yesterday until after the market closed or once they read our newsletter.
Now, trying to time this moment can be harder than finding a needle in a haystack but if you do chart work and watch how events are unfolding then you can make some educated guesses.
The market has been getting rocked but we circled 3 areas to watch for the indexes yesterday and we knew something had to give.
The Dow opened up with an initial pop but traded to a low of 11,700 which was a Franklin away from our 11,600 pivot point. The index then bounced nearly 200 points by the end of the day as the blue-chips finished with a gain of 30 points to finish at 11,896. The bulls still face resistance at 12K while our aforementioned target remains short-term support.
We mentioned the S&P 500 was down nearly 7% during its recent losing streak and fell 8% off its recent high after touching a 2011 low of 1,234 yesterday. The index then bounced 26 points to close at 1,260 for the session, up a six-pack. We mentioned 1,225 could come into play, and the bulls were able to hold this level, but let’s keep this number in on our rear-view mirror just in case. Headwinds remain at 1,275 and 1,300 for the bulls.
The Nasdaq managed to jump 24 points, or 0.9%, and settled at 2,693. Tech traded down to 2,621 and we said to watch the break below 2,650 which could lead to 2,600 which is the March low and a crucial area of support. The index didn’t fall quite that far but couldn’t kiss 2,700 either which is now short-term resistance.
We wanted to cover the S&P Volatility Index (^VIX, 23.38, down 1.41) which fell nearly 6% yesterday. We mentioned in our Weekly Wrap the index broke through resistance at 20 during the prior week and could trade up to 30. However, the VIX seems to have topped after only reaching 25 yesterday at the height of the selloff; 25 on Tuesday; and 26 on Monday.
The VIX isn’t the most accurate way to plan the market’s next moves but it does help when combined with other technical analysis.
With that said, we doubt yesterday was a “true” capitulation moment because futures are pointing towards another test of the recent lows. Dow futures are down 90 points to 11,728 while the S&P futures are lower by 11 points to 1,243. Nasdaq futures are off 18 points to 2,285.
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