Last update: July 2021
Capitulate: verb – to surrender unconditionally, to give up resistance
Contrarian traders seek signs of capitulation in a bear market. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions. Picture the pain getting so bad that beleaguered longs finally stick their grubby digits down their collective throats to puke up what was once a sumptuous purchase. Variations of the theme are summarized by such phrases as, “buy when there’s blood in the streets” or ” you want to be greedy when others are fearful.” I think this week’s crash in the oil pits provides a perfect example.
We’ll use the United States Oil Fund (USO) to illustrate.
Signs of Capitulation
Allow me to introduce the four signs that capitulation is nigh:
- Oversold market
- Ramping realized volatility
- Volume climax
- Implied volatility spike
1. Oversold Market
Selloffs worthy of the capitulation moniker don’t arise from mild conditions, nor do they spontaneously erupt in overbought markets. Instead, they strike when the victim is already down and bleeding, begging for werereprieve. We’re talking after a stock has already been beaten senseless driving the RSI and other such oscillators into the basement.
Does this not describe where crude oil sat on November 11th, the day before the crash? It had fallen eleven days in a row for the first time in decades reflecting an absolute absence of any buying appetite from participants whatsoever. At 20, the RSI was already perched at a two-and-a-half year low. The situation was ripe and indeed in need of capitulation to signal a tradable bounce was underway.
I believe Tuesday’s crash and the subsequent drop of the RSI to 14 was what we’ve been waiting for.
2. Ramping Realized Volatility
For true capitulation, you need urgency in the selling. And that doesn’t come via dojis and small-bodied candles. You need a ramp in actual market movement to signal emotions are running hot, and support zones are melting in the face of the fiery descent. The ramp in realized volatility can be seen in the Average True Range (ATR) indicator.
Note how the ATR was rising gradually during the descent, but finally spiked higher this week touching a two-year high at 37 cents. We’re seeing almost four times the daily volatility experienced last December.
Ramping realized volatility in oil land? Yes, sir.
3. Volume Climax
Panicked selling also manifests itself in the volume indicator. And how could it not? Does it qualify as panic if only a few nervous-nellies are abandoning ship? No. We need widespread liquidation otherwise it’s not severe enough to justify trading off of. Now, take a look at the volume during Tuesday’s plunge.
Total shares traded rocketed to over 83 million marking the highest single-day turnover since November 2016. A climax? I think so. It’s as if everyone who was holding out hope for the long-awaited oversold bounce in oil finally caved in, raised the white flag and surrendered their shares.
This increases the likelihood that a tradable bounce will commence, or at least that peak downside momentum has been reached for a spell.
4. Implied Volatility Spike
There’s a reason volatility measures like the VIX bear the nickname “fear gauge.” Skittish investors desire protection and are often willing to pay ridiculous prices for it. The groundswell in demand for put options drives implied volatility to the moon, thus tipping off spectators that peak panic has likely been achieved.
Did you see implied volatility this week? You can chart it for USO using either the indicator “ImpVolatility” or via the Index OVX. At 35%, the reading was already running hot, but on Tuesday it went into insane mode and jumped to 55%. If that’s not a spike worth printing out and sticking on the fridge for future reference, then I don’t know what is.
So What?
So what do we do when all these signs of capitulation crop up? Consider the following actions:
- First, take profits on bear trades. If you’re a swing trader and don’t want to sit through a bounce in the stock then ringing the register for short trades is the way to go.
- Second, avoid deploying new bear trades. Even though it appears as if the stock suffering capitulation will never rise again, your eyes are deceiving you. It’s always darkest before the dawn. Moreover, the risk-reward for new short trades at this point is terrible so avoid the temptation to chase.
- Third, consider contrarian bullish trades like naked puts or bull puts to capitalize on the sky-high volatility and chance at a rebound in the stock price.
Tackle Trading Resources on Portfolio Protection
Continue learning about this powerful options strategy: Portfolio Protection. From free articles to Premium System and Trading Playbook, Tackle Trading has all the resources you need to MASTER this strategy like a PRO.
Portfolio Protection For Beginners [Free Articles]
Long Put: IWM or RUT
In this video tutorial, Coach Matt walks thru how he has been handling the additional macro risk in the market by trading Long Put options on the IWM.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Protecting Your Money: Create your own Personal Gold Standard
Everyone invests. Everyone has money. Currency is a form of investment since the gold standard was removed from the currency system.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
Tales of a Technician: Tagging the Golden Goose: A Lesson in Portfolio Protection
You’re a goose chaser. Admit it. It’s the gold you seek. And that’s okay. You’re in good company. Most of us round these parts have been searching for the big bird for ages. Some have even tagged one.
Tales of a Technician: A Trick for Financing Portfolio Protection
Come lear a Trick for Financing Portfolio Protection.
I Bought Portfolio Protection…Now What?
Today is the day we layout a game plan for exactly how to manage portfolio protection.
Options Theory: Hedging Basic Series Part 1 – What is Hedging?
What is hedging? Come learn the basics in this 3-part series.
Options Theory: Hedging Basic Series Part 2 – Why do Traders Hedge?
In part one of our new series on hedging, we defined precisely what the concept means. Today we’re turning to the why.
Options Theory: Hedging Basic Series Part 3 – When to Place Your Hedge
With a sound foundation on the what and why of hedging, we’re now ready to dissect the devil. Namely, when do I place my hedge?
Options Theory: Hedging Basic Series Part 4 – How to Hedge a Naked Put
The way that you go about hedging varies depending on what your strategy is. Come learn how to hedge a naughty naked put.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: VIX Spikes and Portfolio Protection
Today I want to talk a bit about the impact VIX spikes have on the cost of portfolio protection.
Tales of a Technician: Managing Protective Puts in a Crash
It’s nailing the management of Protective Puts that separates the men from the boys. Allow me to offer up a few ideas.
Tales of a Technician: How to Trade in a Bear Market
The bears are roaming. And while their sudden emergence likely spelled losses for traders far and wide, the pain doesn’t have to persist. I look at this as a “fool me once, shame on you; fool me twice, shame on me” situation.
Options Theory: This is What Capitulation Looks Like
Contrarians in a bear market seek signs of capitulation. Specifically, evidence that bulls are throwing in the towel and abandoning their once beloved positions.
Tales of a Technician: Of Legacies and Long-term Investing
Herein we explore the perks of lengthening your time horizon and embracing Long-term Investing.
Options Theory: Protective Put Management
You have questions on how to protect a portfolio. I have some answers. You’ll find them here.
Bear Market Survival Guide [Premium System]
Any investor can survive stock market crashes by using The Bear Market Survival Guide because it includes Wall Street’s best-kept secrets for portfolio protection.
Tackle Trading Playbook [FREE for PRO Members]
PRO Members now have unfettered access to the Tackle Coaches’ personal playbook containing thirty-one powerful trading strategies categorized according to the Options Greeks. Bullish, bearish, or neutral market conditions, this Playbook will help you dial up the right call more often and with greater confidence.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
