Market Crashes – Prepare For A Capitulation Low – Be Patient!

October 6, 2008
Author: Peter Stolcers, Founder of OneOption

We are in full-fledged panic mode. You can run but you can't hide. Even the strongest stocks are coming under fire. Now that the bailout plan has been approved, investors are wondering how it will be implemented and how long it will take. It addresses long-term liquidity issues, but it does not address the here and now. The Fed is pumping money into banks as fast as it can and it has doubled the size of its auctions. It is also considering the purchase of commercial paper. Companies need cash now. Europe was down more than 5% overnight. The hawkish chairman of the ECB is going to take serious heat as economic conditions deteriorate. He has kept interest rates high and the credit crisis could be worse in Europe than it is here. With so many different nations, a solution for the ECU will be complicated. Investors are playing it safe and they are pulling all of their money out of the market. This is a bear market and these conditions could last for years. Along the way, there will be sharp, violent rallies. I believe we are setting up for a bear market rally. The market is so oversold that we are due for a major bounce. Short-sellers will be eager to lock in big profits and bargain hunters will start to nibble. In today's chart you can see the head and shoulders formation on a six-year chart. The distance from the neckline to the peak often represents the depth of the decline once the neckline is broken. The low from this morning and the peak are equidistant from the neckline. This move represents a 33% retracement from the peak and in its own right that is significant from a technical perspective. If we see an intraday reversal off of a deep decline, it will be time to get long. The option implied volatility is extremely high and the way to play this is to buy stocks (not options). Stocks are much more liquid and they will move point for point. Once the bear market rally has stalled, take profits. I have extensive articles that I've written on trading How To Trade V Bottoms. This market is a bear market (not a V Bottom), but the same principles apply once a low has been established. In the event that we do see an intraday reversal, I will open up the Live Update bullish results. Stocks will not need to have a cumulative positive net change for the prior three days to make it on the table. It will simply list stocks and descending order, showing the largest dollar gainer at the top. This will allow you to see which stocks are reversing the most from oversold conditions. Normally, earnings season would be at the forefront this week. Corporations can't secure short-term loans to conduct day-to-day business and without it, they might be forced to close their doors. California can't meet its short-term obligations and the entire state is in peril. Cash is the most important element in today's trading and until we see some improvement, the market will decline. Start lining up your long stock positions. Place buy stop orders above resistance. If the market reverses you will get filled on the way up. These orders need to be placed in advance. Once the rally takes place, the move will be so fast that you won't have time to place all of your trades. If the market continues to go down, you won't be filled. I have not seen enough of a bounce today to tell me that this decline will result in a capitulation low. If we don't see any buying, it is likely to drift lower right into the bell. image

Daily Bulletin Continues...

Want Full Access?

Become a Member

Start Free Trial

No credit card required.


Previous Bulletin

October 3, 2008

Next Bulletin

October 7, 2008