Trading Education

Upside Capitulation?

Capitulation is a term used by traders that signifies a climactic end to a recent downtrend in the market, coupled with strong volume and a spike down in prices.  This is the event where all the buyers finally give up, and throw in the towel dumping their losing positions. Often, after a capitulatory event, the market starts to reverse and strengthen (think March 2009 when the S&P500 futures hit the 666 low).

But capitulation can also occur in the opposite direction, when all the shorts finally give up and cover their positions, and all the johnny-come-latelys, who have watched the rally from the sidelines, finally hop on board and buy stocks.  You could call this event “upside capitulation”. This usually signifies a market top, and a correction or pullback often follows.

I think we saw upside capitulation on Friday morning.  On the Premarket Prep show, we were discussing the enormous opening buy imbalances in the S&P 500 components.  If you want to learn more about imbalances you can click here, but to put it simply, a buy imbalance indicates that there are more buyers than sellers at the open and the stock will open higher.

Usually when the S&P futures are trading up 5 points (which they were in the premarket on Friday morning), we see buy imbalances, as many of the stocks will open higher with the futures opening higher. But Friday was special. The opening buy imbalances were enormous.  They were 10-20 times larger than would be expected for a 5 point up move in the S&P futures.

The institutions that were buying the stocks on this open didn’t just want in, they needed in.  Whether it was to offset their options or futures positions (it was quadruple witch), or simply to get more exposure, they needed to buy stocks in a bad way at the open, and the opening imbalances reflected this.

For example,

GE had a 5.4 million share buy imbalance (typical for GE is 200-300K). 

XOM had a 2.4 million share buy imbalance (to put that into perspective, that is $230 million worth!)

JPM had a 1.7 million share buy imbalance

BAC had a 5.4 million share buy imbalance.

WFC had a 2.8 million share buy imbalance.

VZ had a 2.2 million share buy imbalance.

C had a 2.7 million share buy imbalance.

It was huge buy imbalances across the board in the S&P500 components.  Billions of dollars worth. In fact, the imbalances were so large, there weren’t enough stock/index arbitrage players to offset the buy demand in the stocks, and the stocks opened much higher than they should have relative to the futures.

Check out these opens:

GE opened up 53 cents at $25.80.

MRK opened up 91 cents at $56.50.

 

JPM opened up $1.09 at $61.20.

 

PFE opened up 58 cents at $32.49

 

T opened up a ridiculous 71 cents at $34.80.

And the stocks cratered immediately.  But not only did they crater, they kept continuing to sell-off throughout the day, and it spread throughout the market hitting some of the high flyers the hardest.

BIIB lost 8%, DDD lost 6%, NFLX lost 4%, TSLA lost 2.6%, GILD lost 4.6%.

This was a key reversal day in the stocks and in the overall market.  The S&P index opened right at a new all-time high, and then sold off and closed very weak.  Many stocks closed at or near their lows of the day. The ridiculous buying off the opening print and then the immediate sell-off that ensued may have been the capitulatory event the bears have been looking for.  We’ll know more in the coming week, but it looks like there is a distinct possibility that the institutions that HAD to be in this market on Friday morning, may have just bought the top.

Update: I had a rant on the #Premarket Prep show this morning discussing this scenario and why the market is heading lower:

Information Arbitrage

Dennis Dick discusses “Information Arbitrage” at Bright Trading.  Topics include high frequency trading, informed and uninformed order flow, strategy, and tactics for more efficient execution.

AEP and NEE Flash Crash Analysis

AEP and NEE lose more than 50% of their value in one second today, and then rebound entirely.  This entire move caused by market structural issues.  Here is the tale of the tape:

To understand more about trade-throughs and mini-flash crashes, see this month’s CFA Magazine:  Erroneous Combustion

Software Feature: Benzinga Pro

The most important asset to any trader is a quick and accurate news source.  The news service that we use at Premarket Info is Benzinga Pro.  Here is a quick overview of Benzinga Pro, and how we use it in our daily trading routine:

More information about Benzinga Pro can be found at:  www.benzingapro.com

Webinar – Technical Analysis Made Easy

Traders tend to make technical analysis very complicated.  The most powerful technical indicators are really quite simple – support, resistance, and trends.  We’ll discuss these important technical indicators and show you how we use them in our daily trading:

For our daily support and resistance levels click here:  Support/Resistance Levels

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