All stock-market investors look at price and movement. Some investors look at trading volume. A very few look at time.
Conventional thinking about the stock market is linear in that all that matters is the price of an issue. We may consider the trading volume to measure momentum. But, basically, all the average investor cares about is if the price is going up and down, and how much that movement might be. It is only a number.
Yet, we know that in measuring the real world in numbers, the “world” is not flat. Basic linear arithmetic leads to three-dimensional geometry and eventually the study of change —calculus.
Time is as critical and necessary to calculating turning points in stock- market prices as the price itself.
Capitulation is a turning point in stock-price movement at a particular level and at a particular time.
The capitulation at end 2008/early 2009 at the 1,850 area on the stock-market index came as expected at the right price, as that was a critical level in 2005 and 1997.
October 2008 saw very heavy volume—a supposed sign of capitulation—but the index was down 24 percent, falling too far too fast. When it hit that price in October 2008, it was too soon and, therefore, the index stayed at the capitulation area for another four months.
However, that four-month period saw high volatility, with weekly index changes of 5-percent to even 10-percent up and down moves. Therefore, the initial October price drop was not capitulation but a reaction low that then creates “slingshot” price movements that often end up being traps on both the upside and the downside.
The week of November 17, 2008, saw the market down 10.7 percent; the following week the index went 11.7 percent higher. By March 2009, the index was back to the November 17, 2008, low with both buyers and sellers being whipsawed around.
The end of the capitulation came in March 2009 on relatively low volume, and prices started taking off in April 2009.
This current price movement is unlikely to be capitulation; it is both too soon and not the right price for an end to this downtrend. Baron Rothschild is credited with saying that “The time to buy is when there’s blood in the streets.” We are not there yet. But it is a good—maybe a great —short-term opportunity to make profits on the slingshot action.
It is what happens after the capitulation comes that you need to be focused on. A bottom on the market will then see prices move 20 percent higher but probably not any more than that. Do not hesitate to buy when the bottom hits.
However, a monthly close below the capitulation price or a delayed move to that price too late will push prices down 20 percent. The fun of 2016 has just begun.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.