When looking for a bottom in a market that has been in a downtrend, traders often look for "capitulation." Capitulation is defined as a final surrender, often in a panic, when the market has been in a severe downtrend.
True capitulation is rare and it can be difficult to see it when it actually occurs but we had an example of it today. Market players were in a panic this morning on the news of the arrest of an officer of Huawei which many believed would deal a disastrous blow to the recent advances in trade talks between China and the US.
The indices gapped down big and a small initial bounce was crushed with the indices hitting new lows about two hours before the close. That low held and the trading improved the rest of the day with a final sprint on an article from the WSJ about the possibility that the Fed would put rate hikes on hold after the meeting in December.
All the indices finished well off their early lows with the Nasdaq leading. There was still plenty of red and breadth with negative at around 2,600 to 4,650 but there was a sigh of relief the downside momentum had come to an end.
Capitulatory action is supposed to mark short-term bottoms and with a friendly Fed on board and the possibility that the drama over China trade may cool off that could be a good bet. As I've been writing, I'm optimistic about a rally into the end of the year and I'm inclined to proceed with the assumption that the lows that were hit today will hold.
The next step in a recovery from this point is improved stock picking. The FAANGs were the leaders today while banks and energy lagged. We need to watch carefully now for some other pockets of strength to develop. There was some decent moves in some biotechnology names today but finding good charts is nearly impossible at this juncture. Putting new money to work is going to be very challenging and requires careful management.
I'm not sure if today was true capitulation but it was close enough to make me believe that we have a shot at some upside from here.
Have a good evening. I'll see you tomorrow.