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Friday, November 21, 2008

Identifying Capitulation: How to Tell We've Hit Bottom / 综合指数 2008年 11月 20日 / Composite Index 20/11/2008

Identifying Capitulation: How to Tell We've Hit Bottom by Zhuge Liang

Are we there yet? This is the key question and it relates to finding the bottom of the market.

In many ways it's a pointless question. Even if we could identify the turning point in the market with a high level of certainty, there are very few people with the courage to enter at these low points.

The more important thing to look for are the features that will help to identify, first, the end of the market fall and second, the development of a market recovery. These two events may be separated by a few weeks, few months, or by many months.

There are two important features that identify climax selling. The first is the rapid acceleration in the speed of the market fall. Like a Kamikaze dive-bomber, the market first rolls over slowly and then plunges in a vertical dive. This is fear at work.

The second feature is a massive increase in volume. This is panic.

Ordinary people are desperate to get out of the market. Generally the funds and institutions got out of the long-side of the market many months ago. The selling in January and February was dominated by institutions and funds. The current panic selling is thousands of small orders from retail investors desperate to get out of the market.

During the bear market collapse, volumes decline. Fewer people want to buy stock so volatility increases because small trades have a disproportionate impact in a shallow market.

This selling climax shakes out all the weak hands in the market. It kills the margin speculators. It wipes out those who have finally lost patience. It removes the speculative money in the market because people think the risk is too great. This is also called capitulation.

Everybody gives up – and it influences the thinking of a generation. My parents, who lived through the depression, could never entirely shake the idea that the market was a dangerous place.

The activity in the Dow Jones Industrial Average and other global markets shows an acceleration of downwards momentum. The massive increase in volume has not yet developed and this suggests the market bottom is not yet established. There is a high probability that markets will see a selling climax in the next 3 to 5 days.

But here is the important difference. The recovery rally after climax selling is temporary. It is part of a longer-term consolidation pattern that may last months, or even a year, and make more new lows before a new sustainable uptrend can develop. The potential shape of the recovery will be shown in the charts. The bull market rebound rally follows a temporary selloff. A bear market rebound rally follows climax selling. It is a relief rally, but it is not part of a sustainable trend change.

After a bear market, volumes remain low. When you lose trillions of dollars it takes a long time for spare change to start rattling around the economy again. Spare change drives the bull market because money is available for speculations.

In the immediate bear market recovery period the market is dominated by professionals. Finance industry professionals are already being laid off. The least effective are the first to be let go. Only the best will survive the employment washout in the industry and these will be the ones defining the behavior of the consolidation and recovery market. When you trade in these market conditions you are most likely trading against these professional survivors.

Education, not money, plus an abundance of patience are the most important premiums after the bear market.


综合指数 2008年 11月 20日

如图中箭头A所示,综合指数在受到美国道琼斯指数暴跌的拖累下出现跳空开低,形成了一个缺口(Gap),综指最终下滑了12.33点或1.4%。由于综指未能突破887点的胜图自动费氏线的水平,所以887点依然是综指接下来的阻力水平,支持水平则依然是800点的胜图自动费氏线(Fibonacci Retracement)。

如图所示,虽然布林频带(Bollinger Bands)没有继续的打开,但是由于综指正处于布林中频带之下,所以布林中频带(Bollinger MidBand)继续是综指的动态阻力水平(Dynamic Resistance)。换句话说,若布林频带接下来开始打开,而综指还是处于布林中频带之下的话,那综指综指将有确认形成跌势的讯号了。

如图中箭头B所示,成交量虽然稍微增加1.6%,惟成交量还是低于40天的成交量移动平均线(VMA)以下,这是因为综指目前还是算是调整巩固的格局,所以布林频带继续也继续的处于收窄的情形。无论如何,若综指接下来出现大幅度的下跌,而成交量却达到40天平均值以上,这表示综指的跌势严重。

如图中C圈指示,随机指标(Stochastic)继续的处于30%水平以下,所以综指短期的走势继续的属于疲弱中。通常若随机指标一日还是未能突破30%水平的话,那么综指短期的走势将继续有下跌的风险。


Composite Index Daily Technical Analysis 20/11/2008

As indicated by A, the KLCI opened down with a gap, as the Dow Jones Industrial Average performed poorly, the KLCI ended 12.33 points or 1.4% lower. Since the KLCI failed to break above the 887 Fibonacci Retracement, the 887 level is still the resistance for the KLCI while the support is still at 800 points.

As shown on the chart, the Bollinger Bands Width did not really expand, but since the KLCI is still below the Bollinger Middle Band, the immediate outlook for the FBM2nd Board Index is still bearish biased. If the Bollinger Bands Width should expands with the KLCI below the Bollinger Middle Band, more downside risk for the KLCI is expected. The Bollinger Middle Band is still the dynamic resistance for the KLCI.

As indicated by B, total market volume increased 1.6%, but still below the 40-day VMA level. Again, it is usually normal to see a relatively lower volume during the KLCI consolidation. But if the KLCI should start falling with higher volume, it would suggests an increased of selling pressure, which would further dampen the market sentiment.

As circled at C, the Stochastic is still below 30% level, which is the short term bearish region. Therefore, as long as the Stochastic is still below 30% level, the market movement for the short term is still bearish biased.



5 comments:

Banking & Finance Malaysia said...

Yes, agreed totally. We are not at the bottom yet...but we are not that far away.

For long-term investors, it's a good time to start entering now as there are lots of value buys...

Zhuge Liang said...

Hi Banking & amp,

Just a word of reminder : The bears are far from finished.

But from your short comment, it seems you hv a good grasp & understanding of a capitulative situation.

ZL bades WELCOME 2 Bursa-Chat. Hope to hv more comments from you. TQVM

Ivan said...

Hi ZL,

I am new here.Hope to learn from you and other master here in TA.

I love to ask a lot question. Hope you can answer me patiently.

I saw your blog, and I do reliase you always run the TA on KLCI on daily basic. Does it is a must to know the market on daily? 10s :)

Zhuge Liang said...

Hi Ivan,

Intraday charts in Cbox majority 5 mins chart and KLCI daily Technical analysis is as the subject implies >>>> DAILY.

However, There are many LONGTERM KLCI charts purviewed in this blog.

Just visit the archives for numerous KLCI charts longtern with log & arithmatics scales too.

The KLCI Head & Shoulder chart was posted a few times as the KLCI continued it's descend.

Check it out in archives.

TQVM 4ur comments. Point taken.

Yours,
ZL

Ivan said...

ZL,

thank you for your reply.
i will come here oftenly.
thank you

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