In yesterday’s post, on the Dow, I said I was looking for another backtest to the 11,600 area that was the breakout point of the double bottom. It felt like the world was ending yesterday with all the news on how bad things are around the world. Whenever sentiment gets like that its time to put on your blinders and ear muffs and look to the charts for clues which are unemotional. Its the chartists that is the emotional part of the equation. Yesterday’s big down day was fairly rare in terms of down to up volume. The chart below shows just how panicked investors were. Whenever investors panic like yesterday they throw the baby out with the bathwater and then some realize, after the fact, what did I just do. Now when the markets turn backup they will be sitting on the sideline consumed with fear and will wait for the all clear signal to get back in again which will be at higher prices. Yesterday’s capitulation spike in, down to up volume, was the 3rd such spike since the bottoming process started in August. Also note the 2010 bottom also had 3 capitulation spikes that showed up during it’s bottoming process. Where yesterday’s capitulation spike was formed was perfect in that it came on the backtest that was much higher than the lows of the double bottom. Sometimes the down to up volume will mark the low and sometimes it will come as part of the bottoming process. So the bottom line is the 11,600 backtest point is still in play and with yesterday’s capitulation spike the odds go up that it will hold. Watch the 11,600 closely
Dow down to up volume capitulation spike.