Unmasking Stock Market Capitulation? ~ The Risk Averse Alert

Monday, August 04, 2008

Unmasking Stock Market Capitulation?

I have got the read on the NYSE McClellan Oscillator. It is a banquet of confirmation to my "rapid capitulation, and mad bounce" thesis.

Already, the NYSE Composite's pathetic advance relative to the MCClellan Oscillator's strong recovery from its mid-July '08 low has been noted ... as has similarity of the present period to December '07 (particularly by way of price-Oscillator performance leading up to each instance, then and now).

Yet, in truth the more fitting price-Oscillator similarity from an Elliott Wave perspective is in relation to the late-February '08 period ... when the NYSE Composite was poising to fall to the meaningful low it soon afterward set on March 17, 2008.

Either way you look at it, what's to follow appears rather evident ... particularly when considered in the context of my long-held Elliott Wave view.

NYSE McClellan

Now, depending how long you have been reading, you may not be aware the market's presently unfolding capitulation is an event I have been anticipating since way back in April '08.

Up until recently I was inclined to suppose some profoundly more evident moment of capitulation was pending. Who knows? From a price perspective this still might be in store.

However, under the covers — as evidenced by all the various McClellan Oscillator-based measures recently registered — there already has been capitulation. In other words, coincidental circumstances an Elliott Waver would expect to confirm a "C" wave — a third wave — have developed.

I have said it before (back in April/May '08), and I say it again...

Sometimes time must pass before the message revealed under the covers sinks in. Once again the NYSE McClellan Oscillator presents a case in point.

Look at how the Oscillator spent six solid weeks in the negative from May through July. Note how the Summation Index registered a new low over this duration. This identifies and confirms "capitulation" ... the very thing I have been looking for since at least mid-April '08.

Indeed, Summation's failure to set a new low in January '08 was reason I believed the market's March 17, 2008 low was not "bottom." Now, contrarily, the Summation Index has confirmed the NYSE Composite's decline to a new, multi-month low. Taken in combination with a reasonable Elliott Wave view forming a perspective I have held and seen confirmed for many months now ... this suggests a bottom might be near.

Now, also note how the Summation Index, though presently rising, remains deeply negative. This condition supports a view suggesting the NYSE Composite is not yet out of the woods. Thus, some sort of divergence registering here ... while the NYSE Composite falls to a new low ... appears in order.

Depending on how such divergence develops probably will have some bearing on the market's melt-up slated to follow. Should this form coincident to the Oscillator behaving more strongly than the December '07 through January '08 period, the market might more likely melt-up explosively sooner rather than later.

Time will tell. My eyes are wide open...

[5:00 p.m.]
The time to bank a nice profit on Aug OEX 560 Puts could arrive shortly.

First, I would expect the typical rising suspense leading to tomorrow's mid-afternoon coded message from the Federal Reserve's Open Faucet Committee.

Then, an opportunity to cash the 560s, take off a few 520s (letting two ride for posterity), and play(?) a possible bounce following. This outcome appears a reasonable probability.

OEX 5-min

Something like this is what I think possible ... and, indeed, most likely.

Subsequently, we could see a trip back to the S&P 100's July 15, 2008 low in the 550 vicinity. Then, another (final?) bounce ... this per established forecast the market might trade sideways, as it has.

And last, but not least, thud...

The final blow might not be delivered until just after the August contract's expiration on the 15th. Given what I think might be the sooner rather than later melt-up launch, this outlook seems most fitting, and is therefore advisable.

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sdmikev said...

Hey, Tom-

Great commentary as always. Just a quick question about the two updates for yesterday. Granted, it's early and my caffeine infusion has not taken full effect, but I'm a bit confused by the more recent part with regards to the McClellan Summation index. It looks as though you are positing that capitulation has already occurred. How does this outlook affect your feelings with regards to OEX behavior in the near term? Are you still comfortable with your projection (in the 5:00 update) of a pre-FOMC announcement bounce followed by a dive, a rally, and a thud? Or Is the hypothesis that the short term bottom is in one that requires greater respect?

I shed a couple of puts yesterday afternoon to take some profits, but I had an uneasy feeling after the close that it would have been wiser to cash out most if not all of my short positions. The strong premarket action this morning (which granted is always at least a bit suspect) and your second update from yesterday have reinforced my unease.

Anyway, I'm just wondering if what appear to be slightly mixed messages from you are simply indications of a similar level of unease on your part.

Thanks as always for your hard work.

Main St. Mogul said...

I think you should rename your site JUKEBOX because you keep changing your tune!!

So after lambasting Jim Cramer for saying the bottom is in, essentially you are saying the bottom is mostly in.

What happened to the '87-like plunge? It's only going to happen in financials?

TC said...

Sorry about the confusion... The outlook I expressed in my 5:00 pm update remains intact. So too does everything I have indicated over the past several days.

Obviously, the rise out of the gate this morning is a good bit stronger than I suggested likely in yesterday's (i.e. this post's) 5:00 pm update. I continue supposing the S&P 100 still has much more downside remaining. Likewise, I strongly suspect today's burst higher will be given back and a whole lot more ... beginning shortly (as in a matter of hours/minutes).

The point of the McClellan Oscillator analysis simply is to suggest underlying elements suggestive of a capitulation have, indeed, registered already. However, this in no way changes the probability for further selling reminiscent of that which occurred in January. The channel presented in Friday's post containing the entirety of the decline from May 19th has yet to be completed.

You should duly note the performance of the McClellan Oscillator coincident with January's plunge. It indicated support entering into the market. I rather expect something similar will occur as the S&P 100 soon plunges to the area of 520 or so over the next few weeks. In fact, I would not be surprised to see a coincident McClellan performance even stronger than January's, thus providing further evidence a solid bottom is being formed.

Likewise, though, I also would not be surprised if the Oscillator's coincident performance was much like that which occurred from late February going into the March 17th low.

So, in other words, possibilities per the McClellan Oscillators upcoming performance coincident to the S&P 100 falling to new lows over the next few weeks (probably to the vicinity of 520) remain wide open. This coincident performance, however, should provide some indication to the power we might expect behind the market's pending melt-up ... once bottom finally is in.

Per Cramer... he's way too early calling a bottom. As the S&P 100 falls to the vicinity of 520 he will be gnashing his teeth ... and his critics will be having a heyday. This essentially is the reason for my busting his chops. That said, though, it looks like he will not be far off in calling bottom. Truth is ever since making this bottom call he has more or less qualified his position, and wisely so I might add. So, it appears the July 15th low in financials might hold up here. However, the S&P 100 and other indexes will not be so fortunate. And in all probability the low in financials will be severely tested.

Per the '87-like plunge... that's been off the table for quite some time now. My altered outlook has been that capitulation would take some other form.

It has only been recently -- over the past several days -- I have been given to suppose bottom to the market's multi-month correction (going back to last summer) might arrive sooner than I previously had been expecting.

This notwithstanding, though, for months now the S&P 100's ultimate minimal objective has been the vicinity of 520. Again, 520 has been the minimal objective. Not long ago, I also suspected selling still to come might take the S&P 100 as low as 480. I no longer think this is likely. However, 520 still remains in sight.

Price-wise, the manner in which the S&P 100 declines to its ultimate objective in the vicinity of 520 could appear a capitulation much as January's decline did. Indeed, some talking heads probably will speak of this pending decline using this very language.

The point of my McClellan Oscillator analysis simply is to suggest underlying elements reflective of capitulation have been evidenced already. Nevertheless, this by no means discounts the likelihood of a steep decline still to come...

sdmikev said...

Thanks, Tom. As I reread your second post later this morning, I pretty well figured that might be what you were heading for. Being on the west coast often means reading these things at 5:00 am, often without the level of brain cell activation necessary to understand anything more complex than a direct "THIS IS WHAT I MEAN, DUMMY" statement, preferably in at least 36 point Helvetica.