How to Recognize Market Capitulation

With September 15th, 2008's 504 point sell off in the financial markets on the announcement of two bell weather Wall Street firms, I would say capitulation is in the air. It usually takes an event like this to establish a bottom in the markets and today's sell off came on enough volume to be meaningful.

Today could be that day of capitulation! This could be an exciting time in the markets as they need some form of final blow-off or sell off known as "Capitulation" before changing trend. Sometimes it is dramatic, like what is going on with the major U.S. firms on Wall Street.

Actually we had a significant bottom back in July and so far that bottom of 10,827.71 is holding. My analysis actually has a key level of support at 10,683.31. So as the markets sell off near their July lows, the question now is will we get a "Double Bottom" or will July's low be broken sending the markets spiraling further down? As I write this article, the low today (September 16th) is 10,747.70!

Let's take a look at a few charts to see how they can help us determine what the markets will do. For this I will use three charts of the Dow Jones Industrial Average, known as the "DJIA". We will start with the monthly DJIA chart and work our way down to the daily charts:

The DJIA monthly chart below illustrates both a "Key Level of Support" and also a potential "Double Bottom" forming. Remember this is a monthly chart so the last price bar has not finished forming and prices could still drop below the support level before the month ends.

Now let's look at the DJIA Weekly Chart to see if that can help determine if the key Level of support will hold or not.

We can still see the potential "Double Bottom" on the weekly chart, but also notice that the trend down is firmly on place. This is not a good sign that the bottom is in!

Now let's look at the DJIA daily chart using Elliott Wave & Fibonacci Extensions to see if this further helps us with market direction.

Using this analysis we see that prices should head lower to a target zone of 9987 to 10,700. Sp based on multiple time frame analysis and using a variety of technical analysis studies we have determined that the probability is that the market will head lower.

Even though we may have seen capitulation in the markets yesterday, it may take time for the markets to regain their composure and therefore prices could be volatile and may even drop further before rebounding. Is the "Key Level" of Support" and the "Double Bottom" going to hold? Not likely but since we trade in a world of probabilities, anything is possible so always remember to use risk control!

Bennett A. McDowell, founder of www.TradersCoach.com, began his financial career on Wall Street in 1984, and later became a Registered Securities Broker and Financial Advisor for Prudential Securities and Morgan Stanley. Bennett is considered an expert in technical analysis; he frequently lectures and recently authored the bestselling book The ART of Trading.