"Capitulation Volume"

I sent out a quick note about "Capitulation Volume" building in certain assets and that it would likely produce a change in intraday trend and a few people wanted to know what I meant, what this might mean for the market.

First if you understand capitulation in a sense of Dow trends, there's usually a burst of volume when all sellers who are going to sell all do so at once after a prolonged stage 4 decline, that's often known as capitulation. In that sense it means one thing, in other timeframes it means other things, however, the market is fractal in almost all senses so what applies to one usually applies to another in a totally different timeframe.

In a not so important sense as described above, "Ending a stage 4 trend", you've often heard me say that a reversal candlestick is about 2x more likely to be valid if it's on high volume, this is true whether a bullish or bearish reversal candlestick even though candlesticks don't tell us anything about the length of the next trend, just that a trend change in coming. For example...

This is a 5-day chart of USO with a bullish Hammer reversal candle and it's on about 33% more volume than the preceding bar, this makes this reversal candlestick about 2 times more likely to work than one on lower volume than the bar before.

In another sense, we have high volume on a reversal candlestick, but it's not capitulation, it's churning, however it still makes the reversal function of the candlestick much more probable.

This "Evening Star" candlestick has gapped away, it has a small body so it didn't get much traction from open to close, however there's a lot of volume, this is called churning which is in short, strong hands handing off their shares to weak hands and the stock typically falls.

There's an entire art in volume analysis that has been lost for half a decade because of the F_E_D's medalling in the market, but when we see organic events like the raw emotion of this afternoon, volume analysis works and I suppose once the F_E_D is out of the market again it will make a comeback and once again be one of the most valuable, but least used indicators.

As far as today, nothing moves in a straight line for very long (even though it may seem like it).

We had some capitulation like volume that looked like this in the IWM, but I saw it in a number of places and thus the warning.

In this case, I'm guessing, but we have a semi panic going on and there are few shorts in the market or few that are interested in taking profits on a move that's just starting meaning there are few natural buyers as a short is actually a healthy thing for a market because when it falls, there's guaranteed demand as a short cannot realize their gain until the "Buy to cover" so in a falling market they are often buyers and provide a natural bid.

In today's situation, I'd be willing to bet that market makers and specialists absorbed a lot of shares which is their job as long as the order is at market, they facilitate an orderly market by matching buyers and sellers or becoming the buyer of last resort at market, not limit. 

Considering the market is fractal, the same concepts apply, even intraday, a large volume spike as we see (and a bullish reversal candle) is likely to produce a bounce, in this case we can even call it a dead cat bounce, it doesn't mean anything as far as accumulation or distribution, but if you are a market maker that just took on a bunch of inventory at lower prices, you'll want to bounce the market to lighten up on that load.

Even though we haven't seen it since the F_E_D intervened in 2008, higher prices on lower volume is a bad thing for a price trend and often marks the end of a trend unless you have a Bernanke put in place, but in a organic moment in which the market is being moved by the real market forces of fear and greed and not intervention, you can see as prices rose in to the close volume fell off as did the upside in the bounce of that small trend. Keep that in mind, it's likely to make a reappearance as QE is unwound from the market. In today's case, it really didn't mean much at all unless it was something you could use to enter or exit a position.