What Capitulation Looks Like

I mentioned the idea of the market capitulating on 8/9 on twitter recently, and I thought it may be a good idea to look at the concept more closely. Capitulation can be defined as the point in time when market participants finally give up hope on holding a position and throw in the towel. It typically follows a steady decline and culminates in a panic selling event. While the capitulation is typically easy to spot, the true bottom will often take much longer to develop. True bottoms typically develop as market participants lose interest in the instrument and volume and volatility dwindle. This will typically lead to either a retest of the low, or more commonly, new lows. It is not uncommon for a true bottom to occur much later and lower than the capitulation event. Eventually, fresh market participants accumulate the instrument and the cycle begins again. While it is too early to know whether the general markets have already capitulated, I did find a good example of capitulation in a stock.

Research In Motion Limited (USA)   (Public, NASDAQ:RIMM) is a stock that has been in a brutal downtrend since topping out in 2008. After an initial sharp bounce off its bear market lows, $RIMM has been in a steady decline since late 2009. In many respects, $RIMM has been a complete failure in its space, as Apple, Inc. (Nasdaq:AAPL)($AAPL) and Google, Inc. (Nasdaq:GOOG)($GOOG) have eaten their lunch in the mobile phone and tablet business. While $RIMM’s prospects remain dismal, the stock is showing signs of capitulation as it pulls into a key support level on long term charts.

Taking a closer look at capitulation; RIMM was in a fresh intermediate downtrend for most of this year before the selling really accelerated in late June on huge volume. This was a perfect example of panic selling after a long decline of well over 50%. While the capitulation occurred near the $25 level, RIMM continued to bleed out for weeks after the initial dead cat bounce. $RIMM ended up trading into the low $20’s by early August as volume tapered off. While $RIMM is still well within its downtrend, notice how volume picked up on the bounce rather than the decline in late August. Also, $RIMM displayed good relative strength to the overall markets which was counter intuitive considering how weak it had been. This is a subtle clue that selling in $RIMM may be finally be exhausted.

While $RIMM may continue lower, there are at least decent odds that an intermediate bottom is in for the stock. A close above $30 would be a good first step, although it still has a lot of work ahead of it. This is the same pattern I am keeping an eye for in the general markets. It is still too early to know, as the markets are still showing increased volatility and stocks in general still look unhealthy. However, if stocks begin setting up as market volatility dies down, it could signal that a decent trading bottom will have formed.

 

Good Trading,

Joey

 

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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