When bottom? Looking for Capitulation

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Adriaan Admin

Staff member
Jan 30, 2018
Market Cycle

Very similar to the recent bitcoin chart and the Market Cycle Cheat Sheet chart (representing normal bull and bear market cycles as well as the extremer bubble patterns) this same pattern has repeated in all financial markets for all assets and also practically all bubble patterns act similarly (as you might know, bitcoin’s price moves from 1 bubble to the other). Understanding the market cycle as an investor and recognizing in which phase of the cycle a market is, gives a significant advantage to you over the vast majority of (retail) investors that are usually following and acting according to the sentiments as featured in the Market Cycle Cheat Sheet, which leads most of them to lose money in the market.

Study the Market Cycle Cheat Sheet carefully:

wallstreet market cycle.jpg

While at the top of the bull market (the area of maximum financial risk), the smart investor would reduce risk (sell high), the average retail investor however takes on MORE risk (buys high) and while at the bottom of the bear market (the area of maximum financial opportunity) the smart investor seizes more opportunity (buy low), the average retail investor fails to take opportunity (doesn’t buy low or sells low) and therefore the retail investor usually loses money in the market.

And it becomes more complicated, because of the human behavioral biases: the average investor will even lose more money because when he is in a small profit, he becomes risk averse (takes profit too soon). On the other hand, when the average retail investor is at a loss, he takes MORE risks (throws more good money after bad money and/or cuts losses too late), resulting in bigger losses than the smaller profits, with a net result of a loss.

This post will be about seizing the maximum financial opportunity by understanding the bottom of the market and in this case we will focus on a Capitulation bottom.

Essentially there are 2 types of market cycle bottoms that could occur:

  1. Slow bleed: on the chart this looks like a very stretched rounding bottom. If that were to happen to bitcoin, the prediction is that it would take us into November NEXT year before the trend could become bullish again.
  2. Capitulation: the more usual bottom pattern, which we will explore in this post.

Capitulation in general: extreme form of extended panic selling. The capitulation candle can occur any time during a correction/crash, but in and out of itself a single capitulation candle does not necessarily have to signify the bottom of a bear market (like for example the Jan/Feb 2018 capitulation candle, see chart below, does not have to be the bottom of the bear market, because in fact we should assume the bear market had then just started), however a capitulation bottom pattern combined with the required investors’ sentiment of total delusion and despair will most likely give a fair amount of certainty that “the bottom is in”.

In general a capitulation looks like this:

  1. the price goes down very fast in an extreme short amount of time (only a few days), sometimes immediately followed by yet another move down (the selling climax) and then bounces up significantly in the shortest amount of time (the selling climax and the bounce can occur in a matter of hours). See zone “A” in the bitcoin 2014 chart below here.
  2. If not sticked to the charts on your screen, it goes by so fast that most miss the opportunity to buy at the very bottom. On the way down it seems as if there is no bottom and price will just go to zero. Big players and prominent figures are rage quitting and the rest follows by panic selling, but there are just no people that want to buy, which drives the price even further down in acceleration.
  3. At the climax of the capitulation there are no more sellers left and there weren’t any buyers to begin with, so naturally at this point the volume is very low, which is why only a few savvy traders are usually able to catch the true bottom.
  4. A capitulation move is usually between 33-45% move.
  5. The period following the capitulation bottom optionally but very likely is an extreme long period (multiple months) of the price not moving anywhere (within a tight price range), shaking out (the confidence of) all remaining weak hands (zone “B” in the bitcoin 2014 chart below).
  6. But there are other characteristics for a capitulation bottom that do not directly reflect in the charts:
    • Big players and prominent figures in the space that rage quit publicly
    • everybody is hating on crypto
    • the “crypto is dead” articles and posts are everywhere

Look at the “beautiful” capitulation of Jan 2015 that signaled the bottom of the 2014 bear market:

Capitulation bitcoin 2015.png

This is the time frame of maximum financial opportunity: the smart investor is accumulating more of the asset before the general public comes (as usual late) to the party to drive price up in exuberance and providing enough liquidity for the smart investors to distribute (smart “dumping”) their holdings among the retail investors for a good profit.

However, the capitulation of Jan 2015 did signal the bottom of the bear market, it was not yet the END of the bear market, this lasted until Aug 2015, when yet another capitulation occurred, after which soon finally started the new bull trend that led into a new bull market. This capitulation is well visible in this chart with daily candles:

Bitcoin capitulation aug 2014.png

To learn and understand more in depth about market capitulation bottoms in bear markets, especially in relation to bitcoin, I highly encourage you to read this Cointelegraph article that was published Jan 2015, notably 5 days (!!) before the 2015 capitulation bottom actually occurred!

This is how the capitulation candle looked like in late January - early February 2018:

Capitulation January.png

Is it certain that Capitulation HAS to happen before we can go back to the bull market? No, it doesn’t, but until it does, we have to assume we are still in a bear market and every move up should be looked at with a lot of suspicion of being either a dead cat bounce (move up that reverses before the latest high, which in bitcoin’s case is currently at 8.5k) or a bull trap (move up that reverses before the last ATH or before the last bull trap, which in bitcoin’s case is currently 17.5-18k), that in both cases will destroy the bullish sentiment once more and throw the market back into the bear trend. The dead cat bounce is the bear market equivalent of a dip in a bull market and the bull trap is the bear market equivalent of a crash in the bull market.

As long as we have not established a clear bottom by capitulation (or slow bleed) combined with the overall sentiment of desperation among investors, the threat of either a dead cat bounce or bull trap stays present until the 18k level has been breached. By then we would be able to say that the current bottom of 5.8k was probably indeed THE bottom and then indeed in hindsight the very early capitulation of Jan/Feb 2018 was the bottom signalling capitulation after all. Because characteristic number "6" (rage quitting and general hating on crypto) did not occur yet, this is a less likely (though not impossible) and less "healthy" scenario (less healthy in the sense bitcoin would not have properly back tested its former resistance tops, which would leave those potentially on the table for any future crashes).

The more likely scenario is that we are going to need to have a real capitulation first to mark the true bottom, so whenever the trend starts moving in a positive direction we can be more confident in a much earlier stage that prices are indeed more likely to higher than lower (than the bottom), which is the zone of maximum financial opportunity.

Why is the more likely scenario probably more pain to come in the form of an ultimate capitulation?

  1. There is still too much hope and not enough despair in the market sentiment
  2. The forming huge so-called descending triangle on the bitcoin chart is a bearish chart pattern that usually breaks down into the negative.
    • The more often the triangle bottom is tested the more likely it becomes that all the demand dries up (all buying at that price exhausts) and the price pierces right through it to new lows.

So how could that capitulation bottom scenario then potentially look like in bitcoin's current situation? In summary:

  1. First support target, potential low, is around 5k (the 2017 resistance top, which has not been back-tested yet). Because a capitulation candle probably doesn’t start as high as 7460 (the max level to reach 5k at a minimum 33% capitulation) - because of the support zone it has to breach the zone between 5.8-6k - it is not likely a true capitulation could stop at 5k to form its bottom there. If this support level does become the bottom somehow, it will probably be without real capitulation occurring.
  2. The typical descending triangle breakdown price target is usually the distance between the highest top and lowest bottom of the triangle, in this case in percentages a 50% correction, would bring us to approximately 3k AND a 50% correction would be enough to fit a capitulation candle in.
  3. The last scenario would be the zone between 1-1.3k that was the peak of the 2014 bull run and has been a strong resistance in early 2017, but has not yet been back tested as resistance since then.

To study more background of all these “worst case” scenarios that could occur for bitcoin in the near future as bottom of the current bear market, please read this recent Coindesk article.

To conclude
I hope this post mentally prepares you for the very likely events that might unfold (they might not, but one of those probably will) and help you prevent being on the wrong side of the typical market cycle and point to you where you might find the zone of maximum financial opportunity and that you don’t run out of investment capital before those might have reached!

Personal disclaimer
Of course everything in this post is pure personal opinion based on my own research. I strongly recommend NOT to base any investment decision based on this post, but rather do your own research and consult investment professionals.
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