by Raghu Gullapalli, SmartStops contributor . originally published at Minyanville:
Capitulation Buy Set Up: The S&P 500
Everyone and their day trading mother is firmly of the belief that tomorrow’s job number will be a disappointment and that the market will continue its death spiral. But on the off chance fate’s fickle hand intervenes and decides to screw with the short sellers it may pay to be prepared.
One scenario that may play out is a classic capitulation trade. In such a scenario an oversold stock, such as the SPDR S&P 500 (SPY), falls at an unsustainable pace extending itself away from the moving averages. It then snaps back toward the moving averages, sharply reversing direction at the bottom. This small period of time that becomes the focal point of the emotional distress of the sellers, and will provide an opportunity to profit significantly while defining your risk clearly.
The rally that follows the reversal is a signal that the sellers are no longer calling the shots.
Listed below are the signals of an impending capitulation trade opportunity.
- Price action is almost vertical
- Significant separation of candles from the moving averages
- The volume increases with each candle and has the highest volume with the last candle
- As the separation from the moving averages increase, the candlesticks get larger and larger
- The trigger for the reversal is a large hammer bar with an extended bottoming tail or the presence of a long term support level
- Risk is well defined, as your exit if the trade fails, is the bottom of the tail
A similar capitulation set up is visible with the iShares Barclays 20 Year Treasury Bond Fund (TLT) but just the opposite. It is a sell capitulation setup.
The opportunity these trades provide is enormous and the risk is well defined. If properly executed these are trades that offer excellent reward with minimal risk. Something every trader or investor always seeks.
Especially given the price action in the market the past four days, I find myself referring to my SmartStops alerts as a reference quite often. SmartStops has the short-term and long-term stops on the SPY at $118.40 and $115.97