The Mechanics Of Capitulation

By All About Trends

Friday we said:

“Therefore, the rest of the day we do nothing and watch the famous “Into The Close” into a weekend I might add. We'll find out into the close IF we are going to enter “Nervous Nellie Chicken Little The Sky Is Falling Capitulation Mode”. If so, then this is the beginning of the end of this 5th Wave (E Wave) down.”

We watched the into the close folks and we got no lift whatsoever. Which if you have short exposure is exactly what one wanted to see.

This also brings up and interesting point with regards to the “Nervous Nellies” out there. All weekend these types of people are going to be thinking, fearing (watch the VIX for how much fear is out there) and making emotional decisions. With this type of person what typically happens is that they log in to their online brokerage accounts and place sell orders. Keep in mind the moment they do this the market knows their intentions come the open on Monday. What typically happens is that the market makers know they are going to get hit with a rash of orders to sell at the open.

Now here is the interesting part about this. If you are a market maker and have been watching sell orders come in all weekend for the open on Monday you know you are going to be buying stock (that's what market makers do, they SUPPOSEDLY make the market) If you were in their shoes to you really think that you are going to let them out easy with an up market open? (And if the market does open up its been getting sold off thereafter anyway which is a trend in itself) Nope, more often than not you drop the bids because you have selling demand. That's called market makers stepping away. This is how capitulation takes place over a weekend. Baring a news driven Uncle Ben and his wild rice gang event either here in the states or a Euro zone event Monday COULD be a bumpy ride. Good we say if that bumpy ride is to the downside.

Going forward in the next few weeks we have a lot of market moving news events coming our way from the EU back in damage control mode and having to stem off systematic risk AGAIN, to the Greek vote to Uncle Ben talking about QE300? to QE ending June 6th and lets not forget the Supreme Court Obama-care decision to another debt ceiling debate and yes a few wild-cards we're sure. Wash rinse repeat and it will continue till something concrete can occur vs. band aids and hoping it all goes away.

Moving on to more of the technicals it's no secret things are getting oversold. However, oversold can stay oversold when you have the type of news driven time band we are in. Along with a potential capitulation shake out type of market underway?

We probably aren't done going down yet, close though or getting close we'll say that much, at least from a technical perspective. We need to see how Monday shakes out first. We are seeing positive Relative Strength Divergence starting to take place too which says we are getting close to being burnt out, we'll find out Monday if that disappears or not.

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