The search for a stock market bottom apparently has become so desperate that traders have taken to cheering market selloffs.
When markets are in a mostly unfettered slide to the bottom, technicians start looking for signs of a full-scale selloff, or capitulation, that would make the first stage in a turnaround.
So with the market in a series of aggressive drops that have been accompanied by an increase in volume, it gives hope that the end of the market malaise is nearing.
The Monday plunge, most specifically, “was well participated in by the trading community,” says Kevin Ferry, president of Chicago-based Cronus Futures Management and author of the Contrarian Corner. “It sets up for there to be buying when the market’s down.”
Ferry’s constructive view on the market’s behavior was exemplified in Tuesday trading. He said a healthy market—one taking the proper technical steps toward rebuilding—would open near its lows and then improve during the day.
That’s pretty much what happened, when stocks bottomed just a few minutes before Federal Reserve Chairman Ben Bernanke’s speech to Congress and then staircased higher through the session. The Dow held negative, but at elevated levels from the lows.
Strategists are closely watching the current Dow level, which is the lowest the bluechip index has been in more than a year.
A high-volume selloff followed by a quick, strong rebound, then another successful re-test of the lows would have to take place, all confirmed by strong volume, for a true capitulation to take place, according to Keith Springer, president of Springer Financial Advisors in Sacramento, Calif.
“If the market rallies off the lows today, and let's say closes up, we can assume a capitulation phase occurred and can expect a pretty good rebound,” Springer said.
”Keep in mind that we will then need to retest these very lows, usually within two to three months. A failure to rally would imply the breakdowns are valid and the market is in the early stage of another leg to the downside.”
Market sentiment is critical nowadays, and Ferry says he’s getting observations like the one he gleaned regarding this week’s behavior from Twitter, the online social networking that is as popular on Wall Street as it is on Main Street, Hollywood and the world of professional sports. (Ferry’s Twitter handle is @fearlicious.)
When traders are tweeting, Ferry reasons, it means they’re making money—in this case even during a down market—and not off licking their wounds somewhere.
“When the market bounced Friday, Twitter went silent. You could hear crickets,” he says. “When it was falling they were practically doing the wave. They were outright cheering.”
With the prevalence of electronic trading and sparsely populated trading floors on exchanges anymore, Twitter has become a useful tool.
“We use it to monitor what we used to be able to monitor on the floor,” Ferry says. “What is the feel of the trading community? If you can see that you ride with it and you fade it. There is some discernible information coming out of the blather. We are starting to glean important real-time information.”
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