Identifying capitulation in stocks

[stockGURU]

I'm trying to learn more about identifying capitulation in individual stocks, and am hoping we can get a discussion going.

The questions that immediately come to mind are:

1. Does capitulation generally happen at long term support?
2. Is capitulation preceded by a consistent decline on low volume and then a final burst of high volume with no further decline as the last of the weak holders are flushed out and buyers re-enter to meet them?
3. Is capitulation always followed by a clear reversal or do some stocks exhibit an extended period of sideways trading afterwards?

Does anyone have any good previous example of capitulation in individual stocks so we can look at common features in an attempt to identify patterns?

Be interested in any thoughts.

 

[Gringotts Bank]

I'm trying to learn more about identifying capitulation in individual stocks, and am hoping we can get a discussion going.

The questions that immediately come to mind are:

1. Does capitulation generally happen at long term support?
2. Is capitulation preceded by a consistent decline on low volume and then a final burst of high volume with no further decline as the last of the weak holders are flushed out and buyers re-enter to meet them?
3. Is capitulation always followed by a clear reversal or do some stocks exhibit an extended period of sideways trading afterwards?

Does anyone have any good previous example of capitulation in individual stocks so we can look at common features in an attempt to identify patterns?

Be interested in any thoughts.

To me, capitulation means there's no clear bottom in sight technically, and sentiment is low. Traders seeing this will just throw it in. This results in a price chart which is virtually a straight line down with little deviation, eg. WES. New lows each day or second day is always bad, particularly if the volatility is a fairly constant medium range. Volatility will often increase at or near the bottom, so you can look out for that.

 

[CanOz]

I'm trying to learn more about identifying capitulation in individual stocks, and am hoping we can get a discussion going.

The questions that immediately come to mind are:

1. Does capitulation generally happen at long term support?
2. Is capitulation preceded by a consistent decline on low volume and then a final burst of high volume with no further decline as the last of the weak holders are flushed out and buyers re-enter to meet them?
3. Is capitulation always followed by a clear reversal or do some stocks exhibit an extended period of sideways trading afterwards?

Does anyone have any good previous example of capitulation in individual stocks so we can look at common features in an attempt to identify patterns?

Be interested in any thoughts.

I have a climactic action scan, but its not great....will post anyway and maybe we can go from there....

 /* Create date: 11 Nov 2007
The Close Price of 1 bar ago is greater than the Low Price of 1 bar ago AND The Close Price of the current bar is greater than the Close Price of 1 bar ago AND The Volume is the highest it has been for the previous 50 bars */

Buy = Ref( Close, -1 ) > Ref( Low, -1 )
AND Close > Ref( Close, -1 )
AND Ref( HHV( Volume, 50 ), -1 ) < Volume;

I think i did that on the wizard, its AFL.

Looking for high volume.

I think you need a WRB + high volume, say higher than the last n bars and then go from there....

 

[chops_a_must]

A wide ranging bar might also help. You could experiment with the atr.

Also, movement from the lows.

 

[brty]

StockGuru,

When raising the questions about capitulation, the best way to find out is to research. It is very easy to identify capitulation in stocks in hindsite from the charts. You then just have to research the thinking of the participants at the time, ie comments on stock forums, newspaper articles, broker reports etc.

An example is the graph below of CAB from the end of last year. There are 2 notable points, especially when taken in context with coments in the CAB thread on pages 7, 8 and 9.

On page 7, from about the 2nd of November there was an increase in discussion about the fundamental merits of CAB in regard to newspaper reports on the possibity of declining revenues. By the 8th it was WOW about the falling price and another negative about the company. On the 9th there was a large reversal in share price, a wide ranging day on lower volume than the previous down day.

Over the next few days there were no comments until the share price hit a new low on the 14th. The market had now been in effective freefall for 11 trading days. Over the next few days the price continued to fall, yet the number of comments went up as a few posters were stating that they were topping up their shareholding, or buying for the first time.

By the 21st/22nd, the comments had again dried up, except for those noticing the freefall. SKC noted the freefall in the stock in the last 15 minutes of trade on the 22nd, on huge volume. That was the first time I had bothered to look at what was happening.

On the 23rd, there was a large gap down, again high volume was going through, yet the price was not accelerating to the downside, the price was stabilizing in the low 3.60's. As volume continued to rise yet the price could not fall, a change occurred in the bid /ask action. My initial small order was not taken out at the bid, the panic selling seemed to have dried up. I had to buy at market to get a fill. I had to do likewise a couple of cents higher with a larger order, and then a third order later sat at the bid only partially filled.
In other words, despite all the panic in the media and on the forum, you had to chase the price to get a fill. The panic selling seemed to be over. The forum chatter again concentrated on all the fundamentals and reasoning about PERs etc.
After the 23rd there was a slow grinding uptrend to over $5 in Feb. I took my profits at over $5 as the price lost upward momentum.
To sum up why the 23rd looked a better capitulation bottom than the 8th/9th, can be best summed up with what I wrote on the 23rd....

In 2007, The company had a cashflow of 28c/share and dividend of 30c/share. The share price was between $9.50 at the low point and $14 for the high. Interest rates were higher than today.
In 2012 the company had a cashflow of 58c/share and a dividend of 35c/share. If they were to lose 30% of cashflow it would still be nearly 50% above the 2007 level. A share price of 1/3 the 2007 level seems a little ridiculous.

All the bearish talk by some posters goes along with what is currently in the media, yet there is nothing materially different to what was known 3 weeks ago.

On the technical note it has lost nearly 40% of value from the close on 31st Oct, the move down has had several gaps, including the gap down today, my interpretation an exhaustion gap. Volume spiked to the largest in months, pretty much equal to the highest daily volume of the past year, my opinion, stopping volume. Considering most of the days trading was above the open price and it closed towards the upper end of the daily range, there is a high probability today was the low.

Sorry about the long post.

 

[brty]

Just a couple of minor details about the technicals on the chart above. They are useless except for volume. In fact the chart of CAB over that period highlights just how useless indicators are. The price was well outside the bottom of the bollinger bands on the 8th/9th, yet price continued to fall.

Both momentum and MACD were in freefall and not offering any signal on the 23rd, which turned out to be the bottom.

 

[stockGURU]

brty, many thanks for your post! Please don't apologise for it being long, as I found it to be very useful and informative.

Correct me if I'm wrong but your view seems to be that the telltale signs of true capitulation are:

• High volume decline in price, possible gap down.
• The return of aggressive buying at the low. Selling slows as buyers return.
• High volume dumping early in the day as the last of the panic sellers exit the stock, followed by aggressive buying.
• Stock spends most of the day above the open price, and closes towards the upper end of the daily price range.

One of the reasons I started this thread on capitulation is because I have been following BTR closely, and felt that capitulation may have been close, but looking at the chart now I'm not so sure. The sellers still appear to be in control as it seems to be closing at the bottom end of the day's trading range each day. The last three days have had higher than normal volume, indicating dumping, but no real indication that buyers have returned en masse. Although, my feeling is that negativity in the sector (junior resources) is keeping buyers away. Company has a market cap of $40 million, $28 million in the bank, no debt and income starting to flow in next quarter from their flagship Perkoa zinc project in Burkina Faso, which is a joint venture with Glencore. Mine has a 9.5 year mine life. Company also has an impressive copper deposit in Zambia (Mumbwa) which they own 100% of. So, logically, unless there is a major fundamental problem with the company, capitulation can't be far away IMO.

 

[tech/a]

There are many aspects in identifying capitulation highs and capitulation lows.
Particularly technically.
Well beyond that mentioned here.
I disagree with Brty in that you can anticipate capitulations
With some form of Certainty before and during topping or bottoming.

Infact in almost all cases you get 2 chances.

I do agree with Brty that most indicators are pretty useless
In that they record past pric action.
What we need is the ability to see and anticipate major turning
Points in stock price.

Happy to write it up but will take sometime.
Off the Golf and then " Sea and Vines " in Adelaide but will
Mark up some charts and show some realtime charts posted here
Which anticipated moves way before they happened.

 

[skyQuake]

Can't believe nobody has mentioned NCM.

Would have preferred volume to be higher than Mar 28th, but it looks decent for now.

 

[skc]

Can't believe nobody has mentioned NCM.

Would have preferred volume to be higher than Mar 28th, but it looks decent for now.
View attachment 52728

I said it in the NCM thread.

 

[tech/a]

I said it in the NCM thread.

Can you point to me the aspects that identify capitulation for NCM?

 

[brty]

Hi Tech, Stockguru

Firstly, from some website....

Capitulation is term used in technical analysis and in analysing market psychology. Capitulation is one indicator that is used to establish the bottom. "Market capitulated" or "stock capitulated" means that most of the potential sellers already sold.

It's when you are looking for all possible knowns to be known by everyone. Fear is driving the stock and fear alone. If there are unknowns that later become knowns, then the initial buyers of a capitulation can themselves capitulate.

There are many aspects in identifying capitulation highs and capitulation lows.
Particularly technically.
Well beyond that mentioned here.

I tend to agree. Above I mentioned one example, no 2 examples ever seem exactly the same. The capitulation of CAB last November only means the end of that move not necessarily the final bottom.

I have seen capitulations in stocks that were followed by a little sideways action, then had further falls often on lower volume, but falls to new lows none the less. An anticipated capitulation does not mean that money can be made in the opposite direction all the time.

The example of BTR for possible capitulation is not one that I would have any confidence in. There are possible unknowns lurking. The example of CAB was one where the worst possible outcomes were known and expected, hence it was fear driving the market, fear of lower prices.

For me to be interested in a capitulative move in BTR, I would want to see it close at the bottom of it's daily range on high volume (plus at a new low), then gap down the following day, fall further on high volume, then decelerate in the decline of price, market depth fill up on the buy side (doesn't always happen until after the bottom has been reached), prices stabilise and rise. If I were to buy the initial order would only be part of the entire fill; later in the day if prices were holding to rising, look to add rest of order.
It is possible the above does not play out at all. Perhaps BTR has already had it's capitulative move on Friday, perhaps it will go much lower without an obvious capitulative move.

It is ironic to me that you ask about BTR. Many years ago I made a fair bit of money on a move by BTR from a capitulative bottom. The company though was BTR-Nylex, it had the code BTR at the time. I did not buy on the bottom day, but a week or so later. I did however manage to sell on the day of the high of the move, an exact .618 move in price upwards from the bottom. It was the last high before the company had a long decline before it went into oblivion in 1996 IIRC.

 

[CanOz]

Sometimes, but not always, the final capitulation also involves a falling wedge pattern....as in JBH a year ago...

Notice the extreme volume.

CanOz

 

[tech/a]

This is MOST of what I look for.

(1) Often there needs to be something to capitulate.---Obvious?
Not really there needs to be a very high or a very low.

Here is one Pav and I have been on to for a while now.
FTSE 100



This is the monthly

(2) Where is the instrument in terms of its chart life.
Is it at and end of a longer term move. Are a group of longer term moves
coming together. In the case of an index are a good number of the constituents
coming to a capitulation as they did in 2008 and as they are NOW doing.

Again FTSE 100 Daily and Weekly both at wave 5 tops.



(3) Speed of Rise or Fall.
Vertical up relates to a bubble
Bubbles normally revert to their origin
in a similar time frame

.

(4) Highest volume appear often at tops and bottoms.
Easiest seen on weekly and Monthly charts.
Don't worry about being too late! Rarely are there "V" tops or Bottoms.



(5) Capitulation is Very often tested. (Your second chance).

This is where your confirmation for in or out is clear!



(6) Effort

Effort to force sellers to accept lower prices
Wide range high volume down bars.
Effort in Buying
Low volume up bars in a falling market indicating NO DEMAND.
The opposite in a capitulation low.

 

[skc]

Can you point to me the aspects that identify capitulation for NCM?

Technically, a massive gap open met by buyers all day and finishing well above the openning low on high volume.

Fundamentally, a massive non-cash write down is also often a sign of clearing the deck and moving on. Some recent examples include SGP (4 Dec 12), RIO (17 Jan 13), and MGR (2 Feb 13). All three stocks showed strong upward price movement after such announcements.

NCM will obviously still be strongly correlated to movements in price of gold so no one can say it's the bottom for sure, but a lot of fundamental uncertainties and risks beyond the gold price are removed at least temporarily.

 

[tech/a]

Technically, a massive gap open met by buyers all day and finishing well above the openning low on high volume.

Fundamentally, a massive non-cash write down is also often a sign of clearing the deck and moving on. Some recent examples include SGP (4 Dec 12), RIO (17 Jan 13), and MGR (2 Feb 13). All three stocks showed strong upward price movement after such announcements.

NCM will obviously still be strongly correlated to movements in price of gold so no one can say it's the bottom for sure, but a lot of fundamental uncertainties and risks beyond the gold price are removed at least temporarily.

Thanks SKC

Agree with the strong gap down.
Buying wasn't enough to fill the gap.
The gap will be tested.

The speed in which it's closed
The volume it takes to do that if it
Does close will tell more.

While I think your right there are signs
I doubt they are definative ---- yet.
Rarely are there " V" tops and bottoms.
A couple of days will tell a lot.

 

[Bushman]

BTR is a working example that is happening as we speak.

Vol today is over 2m shares, down 18% for the day (most of that in the last hour or so). Major mgt changes a few weeks back and I would suspect that it is a few instos liquidating their holding.

Last 5 days rolling, 10m shares for a -40% move in the share price.

Another recent example is IVA, although you have already had the V-shape there.

Small to mid cap resources; getting to the stage where funds are clearing 25-50 bps holdings @ any cost to exit positions IMO.

 

[tech/a]

BTR is a working example that is happening as we speak.

Vol today is over 2m shares, down 18% for the day (most of that in the last hour or so). Major mgt changes a few weeks back and I would suspect that it is a few instos liquidating their holding.

Last 5 days rolling, 10m shares for a -40% move in the share price.

Another recent example is IVA, although you have already had the V-shape there.

Small to mid cap resources; getting to the stage where funds are clearing 25-50 bps holdings @ any cost to exit positions IMO.

I also think it worth mentioning that capitulation doesnt necessarily mean a reversal of sentiment.
BTR maybe a bit early to call a capitulation.
IVA however is showing an exhaustion of supply.
While there has been some excellent gains for those right on top of it,I doubt that it will continue to rise rapidly.
Infact chances are it will test its lows if supply reveals itself once more.

 

[Bushman]

I also think it worth mentioning that capitulation doesnt necessarily mean a reversal of sentiment.
BTR maybe a bit early to call a capitulation.
IVA however is showing an exhaustion of supply.
While there has been some excellent gains for those right on top of it,I doubt that it will continue to rise rapidly.
Infact chances are it will test its lows if supply reveals itself once more.

IVA may well have run out of catalysts for further highs for the moment. It was a nice move from 10- 17c. It was the Vanguard Precious Metals fund that sold it down to 10c.

@ a 'free float' of only 30%, liquidity is also a challenge for IVA...

 

[Gringotts Bank]

If 'capitulation' means a bottoming out, then I'm not sure a volume surge is always the best indicator. FWD and TSE both had volume surges followed by more heavy losses on lighter volume. It's easier and safer to wait for a higher low pivot imo.

But if volume and volatility surge together, then that's more reliable.