Bear Market Bottom — Capitulation

Bear markets tend to start with the big money selling off over-priced stocks to the unsuspecting retail investors (ie. irrational exuberance at the market top). As the market falls more, the retail investors are deciding they have had enough, and they are selling to other retail investors who think that prices are cheap. But the market keeps falling.

Towards the bottom of the market, the big money starts to buy up again, at over-sold prices. The market might fall a bit more, and the big money keeps slowly buying. They do this in a subtle way so as to keep prices down and not cause excitement.

With more and more bad news, the prices fall further, and more retail investors bail out, with the big money buying more. Then with the “final straw that breaks the camels back”, there is some bad news that prompts many retail investors to dump their stock for any price. They are desperate and there is “capitulation” — a severe sell off that might see the market plunge badly. It might be caused by margin calls (we have seen some of those in this bear market).

Have a look at recent bear market bottoms, and notice the spike low that often quickly rebounds (in many cases, but not all) — eg. the XAO (All Ords) Weekly chart in: March 2003, and the end of the tech wreck in Sept 2001, Jan/Feb 1995, Nov 1992, Jan 1991, Feb 1988.

Question: Can we easily see capitulation? If so how?

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